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ESSENTIALS     OF 
INDUSTRIAL  COSTING 


ESSENTIALS  OF 
INDUSTRIAL  COSTING 


BY 


GEORGE  S.  ARMSTEONG,  C.E.,  M.E. 

CONSULTING  INDUSTRIAL  ENGINEER ;   MEMBER  OF  THE  AMERICAN 

SOCIETY  OF  MECHANICAL  ENGINEERS;   ASSOCIATE  MEMBER 

OF  THE  AMERICAN   SOCIETY  OF  CIVIL  ENGINEERS 


WITH  EIGHTY  ILLUSTRATIONS 


D.  APPLETON  AND  COMPANY 

NEW  YORK       :       1921       :       LONDON 


40041 


COPYBIGHT,    1921,   BY 

D.  APPLETON  AND  COMPANY 


PBIXTED  IX  THE  UNITED   STATES  OF  AMERICA 


3 

'VH>^  Bus.  Admin. 


,  ^ ,  v*-^  Library 


PREFACE 

"It  is  a  fundamental  economic  axiom  that  a  product 
cannot  long  sell  under  its  cost  of  production." 

From  the  above  it  may  be  seen  that  the  cost  of  produc- 
tion is  a  tremendously  important  commercial  consider- 
ation, particularly  at  this  time  of  readjustment,  and  that 
its  sure  determination  could  readily  transcend  all  other 
business  necessities. 

This  text  is  concerned  solely  with  the  principles  and 
methods  by  means  of  which  the  cost  of  production  may  be 
derived.  It  is  based  upon  an  extended  and  varied  prac- 
tice in  many  and  diverse  industries.  It  is  the  culmination, 
not  only  of  this  experience,  but  of  the  professional  con- 
viction that  the  extension  of  costing  in  business  has  been 
retarded  by  the  scarcity  of  literature  in  which  theory  and 
practice  have  been  combined  so  as  to  facilitate  compre- 
hension and  enable  actual  application.  Originally  outlined 
as  the  basis  of  a  course  of  lectures  on  the  subject  for  a 
prominent  university,  it  has  been  developed  in  book  form 
for  a  wider  distribution  of  whatever  good  it  may  possess. 

I  have  sought  to  proportion  details  according  to  im- 
portance, to  anticipate  the  possible  pitfalls  awaiting  in- 
stallation efforts,  maintaining  throughout  a  sympathetic 
perception  of  practical  necessities  and  supplying  solu- 
tions for  representative  difficulties.  The  theory  has  been 
presented  on  what  might  be  termed  the  clinic,  or  case, 
system,  thus  eliminating  speculative  discussion  and  con- 
centrating on  concrete  issues.  It  has  been  deemed  de- 
sirable to  introduce  the  text  with  a  chapter  on  the 
economic  development  and  necessity  of  costing.  The 
chapters  succeeding  develop  the  theory  with  suggestive 

V 


vi  PREFACE 

inferences,    emerging    finally    in    a    complete    working 
example  of  the  principles  established. 

It  is  believed  that  the  data  so  prepared  and  the  details 
incident  to  the  connection  of  the  costs  with  the  general 
books  and  the  preparation  therefrom  of  statements  of 
operation  and  condition  are  complete  and  exhaustive.  If 
the  details  so  depicted  are  carefully  studied,  it  is  believed 
a  working  grasp  may  be  obtained  of  one  of  the  most  essen- 
tial phases  of  costing  hitherto  largely  a  matter  of  prac- 
tice rather  than  of  print. 

Technical  differences  of  opinion  "with  some  of  the  doc- 
trines and  opinions  expressed  herein  will  undoubtedly  be 
held,  but  this  at  least  can  be  said,  that  they  represent 
sincere  and  demonstrated  beliefs  and  have  been  tested 
by  successful  trial. 

George  S.  Ahmsteong 


CONTENTS 

PAGE 

Preface     v 

CHAPTER 

I.    Economic  Development  and  Necessity  op  Costing     .  3 

Accounting,  its  Function  and  Growth 3 

Expansion  of  Industrial  Units 4 

Cost  Accounting 6 

Factors  in  the  Development  of  Industrial  Costing     .  8 

Tariff  Legislation 8 

Ignorant  Competition 10 

The  World  War 14 

Relation  of  Cost  to  Value  and  Price 17 

Costing  the  Crux  of  Commerce 19 

11.    The  Purpose  and  Function  op  Costing 21 

Costing  Primarily  Concerned  with  Profits     ....  21 

Costing  as  an  Aid  to  Business 22 

Price  of  Maximum  Return 23 

Prices   and   Competition 25 

Effect  of  Excess  Capacity 26 

Current  Statements  of  Operation 28 

Classified  Statements  of  Operation 30 

Current  Statements  of  Condition 32 

Prevention  of  Destructive  Competition 34 

Statistical  Operating  Control 35 

Costing  as  Basis  of  Budget 38 

Costing  and  Labor  Management     .......  38 

Costing  as  Red  Tape 40 

Costing  as  a  Business  Expense 41 

III.    The  Mechanism  of  Costing 43 

Methods  of  Costing  Collection 44 

Relation  of  Planning  and  Costing 46 

Basis  of  Modern  Accounting 48 

Reserve  Accounts 49 

Controlling  Accounts 50 

Functional  Division  of  Expense 51 

Departmentalization  of  Expense 52 

vii 


viii  CONTENTS 

CHAPTER  PAGE 

IV.    Elements  of  Costing  and  Sources  of  Costing  Data    .  54 

The  Elements  of  a  Cost 54 

Stages  of  Costing 55 

Variations  in  Proportions  of  Costing  Elements     .      .  56 

Perspective  in  Costing 58 

Operating  Ratio 59 

Sources  of  Costing  Data 60 

Material    Requisition    Distribution 61 

Supply  Requisition  Distribution 63 

PajToll  Distribution 65 

Voucher  Register 67 

Petty  Cash  Expenditures 70 

Entrance  of  Costing  Data   through   Journal    ...  70 

V.    The  Costing  op  Material 72 

Material  Accounting 72 

Facts  Regarding  Material 73 

Material  Specifications 73 

Quantity  of  Material 74 

Value  of  Material 81 

Distribution  of  Invoices 85 

Classification  of  Material   Control  Accounts      ...  88 

Vouchers 90 

Costing  of  Handling  Expense 90 

Material  Stock  Records 92 

Costing  of  Supplies 97 

Scrap,  Waste  and  Spoilage 98 

Costing  of  Scrap 99 

The  Costing  of  Spoilage 102 

Accounting  of  Seconds 104 

Marginal  Values  of  Material 104 

Costing  of  Material  of  Fluctuating  Prices     ....  105 

VI.    The  Costing  of  Labor 108 

Variability  of  Labor  Costs 108 

Timekeeping 110 

PajToll Ill 

Cost  Cards 119 

Classification  of  Labor 121 

Difficulties  in  Costing  Labor 123 

Nonproductive  Labor 124 

Inspection   Labor 126 

Setting-up  Labor 127 


CONTENTS  ix 

CHAPTER  PAGE 

Repair  Labor 127 

Unit  Basis  of  Charging  Labor 127 

Wage  Systems .  129 

1.  Day  Rate 129 

2.  Piece  Rate 130 

3.  Differential  Piece  Rate 133 

4.  Halsey  Premium  Plan 135 

5.  The  Rowan  Premium  Plan 136 

6.  The  Gantt  Task  and  Bonus  System     ....  138 

7.  The  Emerson  Bonus 139 

Service  and  Attendance  Bonus 140 

Administrative  and  Office  Salaries 143 

VIL    The  Collection  op  Expense  in  Costing 146 

Nature  of  Expense 146 

Expense  Departments 147 

AiTangement  of  Equipment 148 

Basis  of  Departmentalization 149 

Collection  of  Expense 150 

Expense  Analysis 151 

Depreciation 167 

Calculation  of  Fixed  Charges 167 

Reserves  for  Replacement 168 

VIII.    The  Costing  op  Depreciation,  Interest,  and  Power    .  169 

Depreciation 169 

Methods  of  Calculation 176 

Importance  of  Depreciation 178 

Appreciation 179 

Interest 179 

Heat,  Light  and   Power 184 

IX.    The   Distribution   and   Application   of   Expense   in 

Costing 203 

Distribution  of  Expense 203 

Contributing  Expense  Departments 204 

Administrative  Exjoense 205 

1.  Office   Department .206 

2.  Garage  Department 206 

3.  Laboratory  Department 207 

4.  Engineering  and  Drafting  Department      .      .      .  207 

5.  Machine  Shop  Department 208 

6.  Millwright  Department 208 


X  CONTENTS 

CHAPTER  PAGE 

7.  Steam,  Light,  and  Power  Department    ....  209 

8.  Repair  or  Service  Department 209 

9.  General  Faetoiy  Department 209 

Direct  Percentage  Rate 211 

Machine  Hour  Rate 211 

The  Unit  Basis 212 

Fallacy  of  Applying  Expense  to  Material     ....  213 

Introduction  of  Concrete  Example 214 

PajToll  Distribution 216 

Supply  Requisition  Distribution 217 

Voucher  Register 217 

Fixed  Charges  and  Similar  Items 218 

Proof  of  Closing  Expense  Analysis 241 

Method  of  Closing  Expense  Analysis 242 

Normal  and  Abnormal  Expense 244 

X.    FixAL  Costing 248 

Final  Costs  in  Assembly  Industry 248 

Final  Costs  in  Continuous  Industry 248 

Examples  of  Final  Costs 249 

Handling  Fluctuations  in  Final  Costs 255 

Ledger  Control  of  Costs 259 

Setting  of  Selling  Price 263 

XL  The  Conxectiox  of  Costing  with  the  General  Books 
AND  THE  Preparation  of  Monthly  Statements  There- 
from      264 

Acid  Test  of  Business 264 

Method  of  Compiling  Profit  Statement 274 

An  Actual  Example .  276 


ILLUSTRATIONS 

PAGE 

1.  Tabulation  Showing  Relation  of  Sales  to  Capital  and  Sur- 

plus, Turnovers  of  Inventory,  etc.,  in  Selected  Industries  24,  25 

2.  Abridged  Statement    of    Operation    Showing    Contrast    in 

Method  of  Computing  Profit  from  Cost  of  Sales  and  from 

Inventory  Differences 31 

3.  Statement  of  Condition 33 

4.  Specimen  Sheet  from  Expense  Analysis  Indicating  the  Ac- 

cumulation of  Expense  for  a  Selected  Department     .      .  37 

5.  Material  Requisition  Distribution 62 

6.  Supply   Requisition    Distribution 64 

7.  Payroll  Distribution 66, 67 

8.  Voucher  Register 68, 69 

9.  Specification   Sheet 73 

10.  Specification  Sheet 75 

11.  Stock  Card    .    ' 76 

12.  Stock  and  Price  Record 78 

13.  Purchase  Requisition 80 

14.  Material  and  Supply  Record 80 

15.  Quotation   Inquiry         81 

16.  Purchase  Order  in  Triplicate 82,83 

17.  Receiving  Record 85 

18.  Typical  Instructions  for  Invoice  Distribution      ....  86 

19.  Voucher  Record 89 

20.  Combined  Voucher  and  Voucher  Cheek 91 

21.  Form  Indicating  Method  of  Supplying  Storage  and  Handling 

Expenses  to  the  Cost  of  Material 92 

22.  Material    Requisition 93 

23.  Request  for  Count 94 

24.  Bin  Tag 95 

25.  Bale  Tag 96 

26.  Supply  Requisition 97 

27.  Melt  Report 100 

28.  Carding  Report 101 

29.  Spoiled  or  Defective  Goods  Report 103 

30.  Material  Journal 106 

31.  Front  and  Back  of  Clock  Card 109 

32.  Memorandum  Authorizing  Entrance  of  New  Employees  on 

Payroll 110 

xi 


xii  ILLUSTRATIONS 

PAGE 

33.  Quit  Slip Ill 

34.  Rate  Change  Request 112 

35.  Payroll 114 

36.  Employee  Wage  Record,  Individual,  Departmental  and  Sum- 

mary        116-118 

37.  38.     Time  Cards  Used  with  Hollerith  Tabulating  Machine     .     121 

39.  Special  Repair  or  Maintenance  Order,  Front  and  Back  .  124, 125 

40.  Specimen  Card  Used  with  Day  Rate  or  Piece  Rate    .      .      .     130 

41.  Coupon  Work  Ticket  Used  in  Connection  with  Piece  Rate    .     131 

42.  Front  and  Back  of  Differential  Piece  Work  Card  Used  in 

Connection  with  the  Hollerith  Machine  at  Link  Belt  Corn-* 
pany,  Philadelphia 133 

43.  Time  Card  Used  with  the  Halsey  Premium  Wage  System    .     135 

44.  Time  Card  Used  with  the  Gantt  Task  and  Bonus  System     .     136 

45.  Standard  Bonus  Percentage  Table  for  Use  in  Determining 

Bonus  Earnings 138 

46.  Service  Card 139 

47.  Bonus  Record 140 

48.  Graphical  Comparative  Representation  of  the  Various  Dif- 

ferential Wage  Systems 141 

49.  Operation  Cost  Record 142 

50.  Parts  Cost  Card 144 

51.  Specimen  Expense  Analysis  for  Selected  Departments  of  a 

Cotton  Mill 152-155 

52.  Specimen  Expense  Analysis  for  Selected  Departments  of  a 

Foundry     156-159 

53.  Specimen  Expense  Analysis  for  Selected  Departments  of  a 

Machine  Shop 160-164 

54.  Distribution  of  Fixed  Charges     . 166 

55.  Standard   Depreciation   Rates   for   Factory   Buildings    and 

Equipment 171,  172 

56.  Standard    Depreciation    Rates    as    Used    in    the    Electrical 

Manufacturing  Industry  .      .         173-175 

57.  Equipment  Inventory 177 

58.  Relative  Position  of  Industries  as  Power  Users  ....     187 

59.  Horsepower  Requirements  of  Machine  Motors      .      .     .  191-198 

60.  Range  of  Steam  Consumption  in   Steam  Prime  Movers     .     199 

61.  Annual  Cost  of  One  Horsepower  in  Factory  Steam  Power 

Plants 200,  201 

62.  Complete  Expense  Analysis  with  Full  and  Actual  Working 

Details  as  Devised  for  a  Cutlery  Manufacturer    .      .      .  219-239 

63.  Expense  Analysis  Proof  Sheet 240 

64.  Determination  of  Excess  or  Insufficient  Actual  Expense  Com- 

pared with  Normal 246 

e5A.  Part  Cost  Card ,     .     250 


ILLUSTRATIONS  xiii 

PAGE 

65b.  Part  Cost  Card 251 

65c.  Subassembly  Cost  Card 252 

65d.  Final  Cost  Card 253 

66.  Final  Cost  Sheet 254 

67.  Final  Cost  Sheet .     255 

68.  Final  Cost  Sheet 256 

69.  Cost  of  Bottles  Shipped 257 

70.  Cost  of  Bottles  Made 258,  259 

71.  Rope  Record 260 

72.  Trial  Balance  as  of  January  1,  1920 265 

73.  Ledger  Balances 266-274 

74.  Cost  of  Sales  for  January,  1920 275 

75.  Cost  of  Goods  Finished  for  January,  1920 277 

76.  Ledger  Postings 278,  279 

77.  Trial  Balance  as  of  January  31,  1920 280 

78.  Statement  of  Operation  as  of  January  31,  1920     ....     281 

79.  Statement  of  Condition  as  of  January  31,  1920      .      .  282,  283 

80.  Chart  of  Accounts  Showing  Closing  Journal  Entiies,  facing  284 


ESSENTIALS     OF 
INDUSTRIAL  COSTING 


ESSENTIALS   OF 
INDUSTRIAL  COSTING 


CHAPTER  I 

ECONOMIC  DEVELOPMENT   AND   NECESSITY   OP   COSTING 

It  is  a  fact  too  little  realized  that  an  accurate  determination  of 
costs  is  fundamentally  related  to  manufacturing  efficiency. — Federal 
Trade  Commission. 

Accounting;,  its  Function  and  Growth.— The  function 
of  accounting  is  a  dominant  factor  in  modern  business 
and  its  rise  to  prominence  is  an  outstanding  feature  of 
the  present  phase  in  the  advance  of  commerce.  Rising 
from  the  primitive  tallies  of  barter  through  the  com- 
mercial progressions  of  centuries  past,  accounting,  con- 
forming to  the  complex  processes  of  modem  economic 
organization,  has  been  evolved  as  a  highly  specialized 
statistical  science.  The  essential  ''debit  and  credit"  con- 
cept dates  authentically  to  the  time  of  Caesar  and  was 
developed  into  finer  and  finer  technique  with  the  increas- 
ing necessities  of  the  commercial  relationships  occurring 
from  that  time  to  this. 

The  concentration  of  the  factory  system  compelled  a 
more  comprehensive  grasp  of  the  productive  operations 
and  stimulated  not  only  the  method  but  the  practice  of 
accounting.  This  statement  is  supported  interestingly 
by  the  fact  that  the  ''Directory  of  the  City  of  London" 
listed  11  accountants  in  1799,  24  in  1811,  and  73  in  1824, 
and  further,  by  the  Company  Act  of  Parliament  of  1845 


4  ESSENTIALS  OF  INDUSTKIAL  COSTING 

which  made  certain  provisions  for  periodical  examina- 
tions by  auditors  of  the  companies  chartered  under  its 
clauses. 

This  time  marked  the  beginning  of  the  promotion  of 
the  first  ventures  in  enterprise  where  capital  from  vari- 
ous sources  was  pooled  and  applied  to  the  pursuit  of 
industry.  The  factory  units  of  that  day  were  small 
affairs  compared  to  those  of  to-day  and  existed  chiefly 
for  securing  the  mechanical  advantage  of  power.  The 
inter^'al  from  then  to  now  has  been  notable  as  mark- 
ing the  birth  and  extraordinaiy  development  of  the 
machine  era.  With  unlimited  power  the  genius  of  men 
turned  to  the  substitution  of  mechanical  means  for  hand 
labor  and  human  energy,  and  the  annals  of  history  reveal 
no  period  comparable  to  that  of  the  Nineteenth  Century 
in  the  mastery  of  the  production  of  the  necessaries  as 
well  as  the  luxuries  of  life,  and  the  manner  in  which  the 
physical  resources  of  nature  were  converted  to  the  uses 
of  man. 

Just  as  the  inventive  faculties  brought  forth  machines 
of  multiplied  productive  power  and  ingenuity,  so  corre- 
sponding methods  of  accounting  were  devised  to  interpret 
in  terms  of  money  values  the  operating  success  and 
condition  of  these  complex  instruments  of  production. 
Accounting  came  into  service  to  register  the  commercial 
activity  of  the  vast  physical  properties  so  developed  and 
to  furnish  the  basis  of  their  operating  control. 

Expansion  of  Industrial  Units.— It  is  perhaps  of  in- 
terest to  illustrate  the  expansion  of  the  manufacturing 
units  and  the  rapidity  with  which  the  small  commercial 
entities  of  the  pioneer  period  reached  proportions  of 
great  magnitude,  and  possibly  nothing  would  describe 
this  better  than  the  figures  of  the  United  States  Census 
of  Manufactures  listed  herewith: 


DEVELOPMENT  AND  NECESSITY  OF  COSTING      5 

Expansion  of  Industrial  Capital 


Year 


1850 
1870 
1890 
1900 
1910 
1915 


Capital  per 

Capital  per 

Establishment 

Employee 

$4,334 

$406 

6,720 

825 

18,387 

1,534 

22,710 

1,000 

68,636 

2,785 

82,638 

3,239 

^Excludes  hand  and  neighborhood  industries. 

In  a  term  of  65  years  the  capital  per  establishment 
increased  20  times  and  the  capital  per  employee  increased 
eight  times.  The  increase  in  capital  per  employee  is  a 
fair  index  of  the  growth  of  the  machine  period.  The 
multiplying  of  capital  per  establishment  represents  some- 
thing beyond  the  expansion  of  machine  production  and  is 
a  direct  measure  of  the  trend  toward  combination  of  units 
and  the  concentration  of  productive  capacity  to  secure 
the  economies  of  that  measure.  This  merging  of  prop- 
erties of  similar  output  was  not  the  only  cause  for  the 
increase  in  capital  value  per  unit,  since  this  trend  also 
was  influenced  by  the  tendency  to  link  up  preceding  and 
following  processes  so  as  to  include  with  greater  com- 
pleteness all  the  stages  from  raw  material  to  finished 
article  and  was  known  as  "integration."  This  period  of 
consolidation  was  especially  accelerated  at  the  close  of 
the  Nineteenth  Century  as  the  following  information  will 
show.  In  the  ten  years  from  1887  to  1897  there  were  86 
large  amalgamations  with  a  total  capitalization  of 
$1,414,294,000,  whereas  in  the  last  three  years  from  1897 
to  1900  there  were  149  mergers  with  a  capitalization  of 
$3,784,010,000. 

These  figures  present  forcibly  the  sharp  trend  in 
events  in  the  sudden  creation  of  huge  properties  of  widely 
distributed  ownership  presenting  large  managerial  and 


6  ESSENTIALS  OF  INDUSTRIAL  COSTING 

financial  requirements.  The  operating  success  of  these 
companies  was  not  a  matter  of  easy  measurement  and 
an  analysis  of  their  condition  and  worth  involved  entirely 
new  classifications  and  comparisons.  Accounting  was  the 
means  of  determining  the  prosperity  and  controlling  the 
policies  of  these  corporations,  and  the  reports  compiled 
annually  were  designed  to  show  first,  a  statement  of 
operation  and  then  a  statement  of  condition,  the  one 
known  as  a  "profit  and  loss  statement"  and  the  other  as 
a  "balance  sheet." 

Accounting  in  smaller  concerns  and  with  fewer  trans- 
actions was  conducted  on  a  receipt  and  expense  basis, 
and  the  relation  of  the  two  gave  a  fair  idea  of  profit,  but 
vrith  the  larger  units  and  the  complex  intei'play  of  credit, 
sinking  funds,  and  accnied  and  deferred  items,  the  basis 
of  accounting  was  shifted  to  that  of  income  and  expendi- 
ture. This  change  and  the  requirement  for  annual  state- 
ments brought  accounting  to  a  high  professional  basis, 
and  when  these  large  corporations  under  pressure  of 
opinion  made  their  statements  public,  a  veritable  clinic 
of  accounting  procedure  was  made  available.  These 
statements  were  studied  and  compared  and  gradually 
standard  methods  were  evolved  which  definitely  formed 
practice  and  thus  brought  about  statistical  studies  of 
great  assistance  to  investors  and  to  the  executives  in 
charge  of  these  properties. 

Cost  Accounting. — Annual  reports  on  operating  show- 
ing the  excess  or  not  of  income  over  expenditures,  and 
of  resultant  net  worth,  were  helpful,  but  immediately 
the  need  was  apparent  for  further  differentiation  and 
more  current  tabulation.  This  need  brought  into  being 
that  specialized  branch  of  accounting  known  as 
**  costing." 

At  this  point  it  may  be  well  to  digress  and  to  insure 


DEVELOPMENT  AND  NECESSITY  OF  COSTING      7 

a  full  appreciation  of  the  fact  that  the  machine  age  had 
also  called  into  play  the  relatively  new  profession  of 
applied  science,  or  engineering.  Machinery  required  a 
knowledge  of  kinematics,  mechanics,  and  properties  of 
material,  and  successful  production  was  essentially  a 
function  of  the  handling  of  and  attention  to  big  instru- 
ments known  as  ''plant  and  equipment,"  which  in  their 
entirety  define  the  collective  term — "engineering." 

It  is  also  interesting  to  observe  at  this  point  that,  as 
engineering  talent  brought  into  being  increasingly  mar- 
velous mechanical  creations  of  larger  scale  and  greater 
complexity,  it  similarly  controlled,  with  the  monopoly 
of  exclusive  knowledge,  the  methods  of  design,  construc- 
tion, and  operation,  and,  as  a  by-product  of  extensive 
and  varied  experience  in  numerous  installations,  gradu- 
ally acquired  a  grasp  of  the  economic  background  which 
in  last  analysis  controlled  the  whole  scheme.  Indeed  it 
has  been  said  by  a  noted  engineer  ' '  that  the  adaption  of 
scientific  principles  to  the  production  of  goods  is  the 
primary  field  of  the  engineering  science. ' ' 

When  the  first  blush  of  inventive  success  had  passed 
and  the  problem,  instead  of  being  straight  mechanics,  be- 
came one  of  balanced  financial  factors,  the  broader 
gauged  engineers  sought  to  express  engineering  units  in 
terms  of  money  values  and  so  their  labors  impinged  on 
the  field  of  accounting.  This  contact  in  the  course  of  time 
resulted  in  a  composite  statistical  process  whereby  the 
principles  of  accounting  as  well  as  those  of  engineering 
were  applied  to  the  control  of  industrial  operation.  This 
process  in  brief  is  known  as  "cost  accounting." 

So  the  commercial  world  witnessed  the  arrival  of  a 
new  and  powerful  aid  to  the  successful  conduct  of  manu- 
facture, and  technical  interest  in  the  subject  was  both 
strong  and  productive.    The  pioneers  of  cost  accounting 


8  ESSENTIALS  OF  INDUSTRIAL  COSTING 

can  hardly  be  said  to  date  back  further  than  1900,  yet 
reference  to  the  texts  of  that  time  will  show  a  very  ele- 
mentary development  compared  with  the  brilliant  and 
ingenious  practice  which  has  since  been  established. 

Factors  in  the  Development  of  Industrial  Costing.— 
There  have  been  several  successive  incidents  which  have 
furnished  impetus  to  the  rapid  advance  in  the  technique 
of  cost  accounting  and  these  may  be  considered  profitably 
at  this  time. 

Tariff  Legislation.— American  industries  had  for  years 
been  regarded  as  something  more  than  minors  in  the 
eyes  of  the  law — they  were  actually  considered  infantile 
compared  with  the  established  manufactures  of  Europe, 
particularly  England.  The  phrase,  *' protect  our  infant 
industries,"  was  the  chief  motive  of  our  tariff  legisla- 
tion, and  quite  properly  it  did  designate  the  fact  that 
enterprise  could  not  be  promoted  in  this  country  against 
what  might  develop  as  aggressive,  even  destructive,  for- 
eign competition.  Further,  the  standard  of  living  in  this 
country  was  superior  to  that  of  any  other  country  and 
this  condition  rested  entirely  on  a  higher  wage  scale. 

Comparative  costs  of  production  showed  higher  fig- 
ures for  the  United  States  than  Europe,  and  this,  with 
the  other  factors,  instituted  the  protective  tariff  policy 
which  has  been  an  almost  uninterrupted  influence  in  our 
foreign  commerce.  It  has  been  designed  to  restrain 
importation  which  would  ruin  the  established  industries 
of  like  kind  in  this  country,  although  the  tariff  schedules 
for  years  Avere  more  the  footballs  of  politics  than  mat- 
ters of  strict  economic  equities. 

Pressure  for  tariff  reform  compelled  some  more  ac- 
curate basis  of  legislation  than  had  previously  been 
available,  and  a  tariff  commission  was  constituted,  the 
chief  function  of  which  was  to  establish  relatively  the 


DEVELOPMENT  AND  NECESSITY  OF  COSTING      9 

true  costs  of  various  commodities  as  produced  here  and 
abroad.  This  commission  produced  voluminous  reports 
and  stimulated  thereby  a  consideration  of  the  proper 
basis  of  costing,  as  it  was  quickly  seen  that  without  a 
dependable  method  of  measurement,  such  comparisons 
were  not  any  closer  to  facts  than  the  limits  of  error  in 
the  measure.  Tariff  history  clearly  related  a  continuous 
decrease  in  protective  provisions  and  finally  recorded 
a  tariff  based  on  revenue  principles  entirely. 

The  margins  of  profit  in  manufacture  had  been  de- 
creasing, in  fact,  as  the  first  promotions  passed  and  the 
speculative  features  of  the  unknowoi  were  removed  by 
actual  experience  and  demonstration,  more  capital  was 
invested,  capacity  extended,  and  the  returns  naturally 
fell.  As  instance  of  this  tendency  the  earnings  of  a  large 
steel  corporation  are  tabulated  herewith: 

Year  Earning  Per  Ton 

1902 $13.25 

1903 10.50 

1904 8.51 

1905 10.45 

1906 11.90 

1907 12.55 

1908 12.06 

1909 10.98 

1910 10.86 

1911 8.91 

1912 6.67 

1913 9.05 

1914 6.00 

The  tightening  of  margins  and  the  absence  of  stronger 
protective  tariff  provisions  compelled  closer  scrutiny  of 
business  operation,  and  under  these  circumstances,  as 
always,  increasingly  adequate  methods  of  analysis  or 
costing  were  forthcoming.  To  quote  Sherer  on  this 
point ; 


10  ESSENTIALS  OF  INDUSTRIAL  COSTING 

The  pressure  of  industrial  circumstances  directs  the  intelli- 
gence of  many  minds  towards  the  comprehension  of  some  single 
central  point  of  difficulty,  the  common  knowledge  of  the  age 
induces  many  to  reach  similar,  solutions :  that  solution  which  is 
slightly  better  adapted  to  the  facts  comes  out  victorious. 

Ignorant  Competition.— Another  powerful  impetus 
which  furthered  scientific  costing  was  the  ruin  from  the 
blasts  of  ignorant  competition.  As  productive  capacity 
fluctuated  with  demand  there  came  periods  of  surplus 
production  and  bitter,  even  savage,  competition.  Trading 
often  became  a  chase  or  pursuit,  in  which  whatever  com- 
pensation resulted  came  from  the  activity  itself,  as  the 
profits  were  frequently  small  and  occasionally  non-exist- 
ent. A  few  barren  years  pointed  the  futility  of  this 
policy,  although  manufacturers  pressed  to  their  limits  had 
set  their  security  generally  on  what  was  their  presumed 
cost  of  production. 

The  repeated  failure  of  profit  to  materialize  after 
trading  success  extended  on  these  costs  soon  brought 
manufacturers  to  question  the  machinery  and  method 
used  in  the  derivation  of  the  costs.  The  surprising  vari- 
ations were  explained  almost  entirely  in  the  differing 
bases  of  calculation  and  the  obvious  need  for  such  a 
pressing  situation  was  the  establishment  of  a  uniform 
system  of  costs. 

The  period  from  1908  to  date  has  seen  a  pronounced 
movement  to  secure  such  uniformity  in  system  and  al- 
ready at  least  fifty  progressive  associations  of  manu- 
facturers of  similar  products  have  either  secured  or 
considered  definite  plans  for  securing  the  benefits  of  a 
uniform  method  of  costing  for  the  members  of  their 
respective  associations.  The  wisdom  and  promise  of 
this  policy  among  manufacturers  is  something  which  al- 
ready has  been  apparent  to  them  and  cannot  fail  but 
react  to  the  benefit  of  the  country  as  a  whole,  whose  best 


DEVELOPMENT  AND  NECESSITY  OP  COSTING     11 

ends  are  served,  in  the  last  analysis,  by  sane  competition 
and  by  the  prosperity  and  not  bankruptcy  of  its  produc- 
ing' enterprise. 

To  one  who  has  had  access  to  these  comparisons  of 
costs  of  identical  articles  and  of  cost  methods  of  manu- 
facturers, the  discordance  passes  belief.  If  any  argu- 
ment should  be  advanced  for  a  favorable  regard  toward 
costing  or  to  give  reason  for  the  appearance  of  this  or 
similar  volumes,  it  would  be  contained  convincingly  in 
such  data,  which  have  for  the  first  time  made  it  possible 
to  show  the  enormity  in  variations  and  the  grave  possi- 
bilities which  can  result  from  the  absence  of  or  ignorance 
of  proper  costing  principles  and  methods. 

In  one  industry  the  prices  varied  as  widely  as  85 
per  cent  on  standard  products  and  the  costing  methods 
showed  the  reason  for  the  irregularity.  In  another  in- 
dustry the  highest  and  lowest  costs  on  identical  articles 
and  the  average  compared  as  follows : 

Range  of  Costs  on  Identical  Articles 


Article 

Lowest 

Highest 

Average  of 
25  Companies 

1 

$9.36 

$11.24 

$10.50 

2 

8.12 

11.00 

10.40 

3 

13.66 

19.24 

16.94 

4 

14.80 

18.20 

16.98 

5 

6.70 

11.16 

9.28 

6 

10.32 

17.26 

13.76 

Article  six  shows  a  difference  between  the  lowest  and 
highest  of  over  65  per  cent,  article  five  similarly,  and  not 
one  of  the  articles  compare  between  the  lowest  and  high- 
est within  20  per  cent,  which  exceeds  what  would  be  an 
average  of  the  profit  on  sales. 

It  is  significant,  in  the  light  of  these  cases,  to  learn 
the  effect  of  such  insufficiency  on  actual  profits,  and  here 


12         ESSENTIALS  OF  INDUSTRIAL  COSTING 

we  may  turn  to  the  published  reports  of  the  United  States 
Internal  Revenue  Department  for  1917  (the  most  recent 
year  available).  This  report  shows  that  79,642  manu- 
facturing corporations  reported,  and  of  these  20,854 — 
or  26.1  per  cent — showed  no  net  income.  The  total  gross 
income  of  all  these  corporations  was  $42,200,635,483,  on 
which  a  net  income  was  returned  (exclusive  of  income 
and  excess  profits  tax)  of  $4,231,772,272,  or  a  little  over 
10  per  cent.  The  report  of  the  United  States  Internal 
Revenue  Department  does  not,  of  course,  show  the  range 
in  profits  and  only  shows  the  average. 

I  present  in  this  connection  a  record  of  the  experi- 
ences of  an  auditing  finn  bearing  on  this  point,  published 
originally  by  one  of  the  partners.  The  record  shows  the 
wide  range  in  return  on  invested  capital  which  their 
examinations  indicated  as  existing  in  various  companies. 
The  period  reported  is  prior  to  1914  and  the  results  are 
as  follows: 

Range  of  Return  on  Invested  Capitaij 

10  cases  earned  40  per  cent  or  more 
7  cases  earned  30  to  40  per  cent 

11  cases  earned  25  to  30  per  cent 
16  cases  earned  20  to  25  per  cent 
26  cases  earned  15  to  20  per  cent 
16  cases  earned  12  to  15  per  cent 
11  cases  earned  10  to  12  per  cent 
20  cases  earned    8  to  10  per  cent 

5  cases  earned  less  than  6  per  cent 
14  cases  earned  less  than  5  per  cent 
4  cases  did  not  earn  interest  charges 
3  cases  showed  actual  loss 

Of  143  cases,  26,  or  over  18  per  cent,  earned  either  noth- 
ing or  no  more  than  the  legal  rate  of  interest  on  the 
invested  capital. 

These  figures  represent  various  industries  and  it  may 
be  claimed  that  the  range  does  not  indicate  so  much  ineffi- 


DEVELOPMENT  AND  NECESSITY  OF  COSTING    13 

ciency  as  inherent  differences  in  the  industries  them- 
selves. But  in  one  entire  industry  the  range  in  return 
on  invested  capital  went  from  0.87  per  cent  to  27.6  per 
cent  with  an  average  less  than  six  per  cent. 

Also,  in  another  industry  the  profit  on  sales  varied  as 
follows : 

Range  of  Profit  on  Sales 

1  concern  showed  27  per  cent  profit 
1  concern  showed  25  per  cent  profit 
1  concern    showed  20  per  cent  profit 

1  concern    showed  14  per  cent  profit 

2  concerns  showed  12  per  cent  profit 
5  concerns  showed  10  per  cent  profit 
2  concerns  showed  7  per  cent  profit 
2  concerns  showed     6  per  cent  profit 

1  concern    showed    4  per  cent  profit 

2  concerns  showed  loss 

Of  course,  these  variations  in  profits  are  more  the  re- 
flex of  mismanagement  than  anything  else,  but  there  is 
no  doubt  but  that  much  of  the  condition  results  from 
ignorance  of  proper  costing  methods.  Indeed,  the  Fed- 
eral Trade  Commission  has  recognized  the  urgency  of 
proper  costing  and  has  published  a  most  helpful  and 
informing  pamphlet  on  the  subject  of  '^  Manufacturing 
Costs."  In  this  pamphlet  they  estimate  as  the  result 
of  their  investigations,  favored  by  the  wide  means  at 
their  disposal,  that  only  10  per  cent  of  the  manufacturers 
in  this  country  cost  adequately  and  the  remaining  90 
per  cent  reveal  methods  going  from  mere  insufficiency  to 
utter  ignorance.  That  the  connection  between  this  con- 
dition and  those  revealed  by  the  United  States  Internal 
Revenue  is  organic  and  direct  needs,  it  is  thought,  no 
further  argument. 

Business  is  strewn  with  failures,  as  the  following 
mortality  taken  from  System  will  indicate : 


14         ESSENTIALS  OF  INDUSTRIAL  COSTING 

Death  Rate  in  IManufacturixg 

The  rate  is  given  as  the  percentage  of  failures  to  the  total  in 
business  during  a  period  of  30  years. 

Line  Death  Rate 

1.  Furniture  53.7  per  cent 

2.  Flour  and  grist  mill  products 53.0  per  cent 

3.  Iron  works  products 58.9  per  cent 

4.  Printing    48.2  per  cent 

5.  Lumber  and  timber  products 75.0  per  cent 

6.  Boots  and  shoes 57.1  per  cent 

7.  Cigars  and  tobacco 75.4  per  cent 

8.  Hosiery  and  knit  goods 30.0  per  cent 

9.  Creamery  products 56.5  per  cent 

10.  Brass,  bronze  and  copper  products 52.1  per  cent 

11.  Clothing    43.3  per  cent 

12.  Drugs 68.1  per  cent 

13.  Automobiles  57.1  per  cent 

14.  Carriages  and  wagons 71.6  per  cent 

Death  rate  for  14  leading  lines 57.1  per  cent 

Death  rate  for  199  other  lines 66.9  per  cent 

Death  rate  for  1,327  factories  in  213  lines. .  62.0  per  cent 

The  war  has  strengthened  the  financial  reserve  power 
of  industries  generally,  but  prior  to  1914  the  risks  of 
receivership  in  industry  were  greater  than  other  com- 
mercial enterprise,  as  the  following  figures  T^all  evidence : 

Risk  of  RECEnT:RSHip  in  Per  Cent  of  Capital  Invested 

Steam  railroads   1.84  per  cent 

Industrials 2.07  per  cent 

Public  utilities 0.37  per  cent 

Costing  is  the  happiest  illustration  that  "knowledge 
is  power"  and  that  failure  to  secure  this  knowledge  is 
a  business  sin  which  will  lead  inevitably  to  death  as  its 
wage. 

The  World  Wax.— The  third  impetus  to  the  recognition 
and  adoption  of  costing  as  a  justifiable  business  necessity 
was  the  descent  and  toils  of  war.  Modern  warfare 
quickly  evidenced  itself  as  a  contest  of  industrial  strength 
and  resources,  and  its  demands  exposed  all  weaknesses 


DEVELOPMENT  AND  NECESSITY  OF  COSTING    15 

with  the  searching  persistence  of  a  surgeon's  probe.  The 
war  effort  in  industry  brought  the  concentrated  intel- 
ligence of  the  country  to  its  problems,  and  wherever  bad 
conditions  as  well  as  inefficient  practice  existed  they  were 
exposed.  American  industry  responded  with  less  diffi- 
culty than  English  industry  because  in  America  higher 
knowledge  and  better  methods  had  leavened  somewhat 
the  huge  industrial  lump  which  in  England  had  been 
resisted  until  then  with  the  full  strength  of  that  nation's 
traditional  conservatism. 

It  is  particularly  significant,  though,  that  one  of  the 
first  publications  of  the  British  Ministry  of  Reconstruc- 
tion was  a  pamphlet  on  the  "Uses  of  Costing"  which  ap- 
peared in  1919.  In  this  pamphlet  the  conclusion  of  the 
United  States  Federal  Trade  Commission  is  noted,  that 
less  than  10  per  cent  of  American  manufacturers  knew 
their  costs  and  without  reserve  or  apology  this  Ministry 
states  that  "competent  opinion  places  the  English  figure 
at  five  per  cent. ' '  They  further  say,  which  is  of  interest, 
that  "practically  all  industry  has  some  sort  of  accounts, 
but  not  many  cost  accounts.  Anything  which  relates  to 
collecting  debts  or  the  cash  balance  is  elaborately  re- 
corded, but  whatever  pertains  to  the  due  appreciation  of 
the  greatest  asset,  the  labor  is  rare,  partial,  or  obscure." 

Thus,  in  the  two  greatest  commodity-producing  coun- 
tries in  the  world  it  is  found  that  intelligently  directed 
control  of  the  vast  and  complex  machinery  of  manufac- 
ture exists  in  less  than  10  per  cent  of  the  one  and  five 
per  cent  in  the  other  in  industry  as  a  whole.  This  de- 
plorable condition  is  one  which  is  well  on  the  way  to 
remedy,  once  recognized  and  admitted.  The  processes 
of  cost  accounting  are  well  established  and  demonstrated, 
and  all  that  is  lacking  is  the  initiative  and  willingness 
to  adopt  and  install  them. 


16  ESSENTIALS  OF  INDUSTRIAL  COSTING 

The  condition  as  described  is  not  as  desperate  nor  as 
retrograde  as  might  appear.  It  is  simply  a  natural  phase 
in  the  maturing  of  the  industrial  organism  which  has 
exhibited  similar  evidences  of  unequal  development  and 
inability  to  function  efficiently  before.  There  is  scarcely 
a  fundamental  policy  in  industiy  to-day  which  did  not 
arrive  slowly  and  painfully.  The  whole  stnicture  has 
always  been  somewhat  of  a  growing  Frankenstein  which 
overtaxed  its  contemporaries  but  which,  nevertheless, 
was  ultimately  directed  properly.  The  general  prac- 
tices of  attractive  plant  settings  and  arrangements,  wel- 
fare organizations,  insurances,  such  as  life,  liability,  etc. 
are  all  institutions  which  came  after  opposition  was  en- 
lightened by  a  recognition  of  their  business  expediency. 
So  in  the  matter  of  costing,  the  situation  and  tendency 
are  simply  traditional  manifestations  of  the  resistance 
to  change  which  have  retarded  almost  every  stage  in  the 
progress  of  industry. 

Nor  should  this  inertia  to  change,  this  seemingly  ob- 
stinate disregard  of  measures  of  primary  self-interest, 
be  charged  against  plant  owners  as  evidence  of  incompe- 
tence. Criticisms  on  this  point  must  consider,  first,  the 
huge  responsibility  which  fastens  on  men  engaged  in  any 
entei'prise.  The  burden  of  business  is  not  an  easy  one ; 
the  infinite  details,  the  absorption  in  daily  demands,  the 
ebb  and  flow  in  the  stream  of  production,  the  eddies  and 
whirlpools,  all  keep  a  man's  eye  on  the  compass  and  his 
hand  at  the  helm  to  the  loss  of  observations  of  the  stars. 

Sufficiently  assuring  is  it  to  know  that  now  the  science 
of  cost  accounting  has  arrived,  it  has  the  aid  and  urging 
of  governmental  investigation  and  it  has  the  examples 
of  successful  and  telling  practice  in  enough  cases  to  make 
it  only  a  matter  of  short  time  before  it  will  become  a 
■universal  business  custom. 


DEVELOPMENT  AND  NECESSITY  OP  COSTING    17 

This  introduction  has  gone  to  some  length  because 
a  study  of  cost  accounting  should  rest  upon  a  sympa- 
thetic attitude  and  should  predispose  the  reader  or  stu- 
dent in  its  favor,  as  working  details  might  otherwise  be 
tedious  and  insignificant.  Cost  accounting,  therefore, 
must  be  regarded  as  a  logical  phase  in  the  evolution  of 
industry  and  a  process  which  itself  has  yet  to  develop 
its  fullest  powers  and  value. 

Relation  of  Cost  to  Value  and  Price. — So  much  for  what 
might  be  called  the  economic  forebears  of  cost  account- 
ing, and  now  let  us  consider  more  fully  the  meaning  of 
''cost"  and  its  relation  to  its  fellow  terms,  "value"  and 
*' price."  The  terms  "price,"  "value,"  and  "cost"  are 
curiously  confused  in  popular  usage,  and  yet  the  clearest 
definition  of  them  should  be  in  mind  if  the  object  and 
significance  of  cost  data  are  to  be  understood. 

Value  is  the  very  essence  of  the  process  of  exchange 
and  underlies  the  multitudinous  transactions  which  com- 
pose commerce.  Treatises  have  been  written  on  value 
and  the  term  has  been  extended  to  all  shades  of  signifi- 
cance and  meaning,  but  there  is  one  essential  quality 
which  is  the  vital  attribute  of  value,  surmounting  all 
others  in  importance,  and  that  is,  utility.  Utility  com- 
passes, in  a  word,  the  capacity  of  an  object,  commodity 
or  service  to  render  satisfaction.  This  is  the  paramount 
purpose  of  supply  to  render  satisfaction,  or  to  convey 
utility,  and  value,  it  has  been  said,  is  the  calculation  form 
of  utility.  That  is,  in  the  labyrinth  of  wants  for  com- 
modities and  the  capacity  and  desire  for  their  satisfac- 
tion there  must  come  some  common  denominator,  some 
universal  language  or  formula  which  will  equate  the  con- 
flicting elements  or  forces  to  a  basis  of  comparative 
strength  or  influence.  By  this  is  meant  that  life  has 
evolved  far  beyond  those  primitive  conditions  where  each 


18  ESSENTIALS  OF  INDUSTRIAL  COSTING 

man  was  a  host  unto  himself,  growing  his  own  wheat, 
grinding  his  own  flour,  with  his  wife  spinning  yam  and 
weaving  cloth  from  which  the  family  garments  were 
fasliioned. 

The  point  is  that  to-day  is  an  age  of  specialization  with 
the  individual  devoted  to  the  production  of  some  par- 
ticular commodity  or  service.  His  wants  are  no  longer 
self-supplied  but  are  provided  for  by  the  complex  proc- 
esses of  exchange,  the  extent  of  satisfaction  being  con- 
ditioned by  the  degi*ee  of  his  ability  to  participate  in 
this  exchange.  It  is  evident  that  50  pounds  of  worsted 
yarn  cannot  be  traded  for  an  equal  quantity  of  the  raw 
wool  from  which  it  is  spun,  and  yet  a  relation  exists 
between  them  which  must  be  expressed  if  the  business 
of  wool  growing  and  worsted  yarn  spinning  are  to  pro- 
ceed. Value  may  be  defined  then  as  the  ordinary  means 
of  conveying  the  stimulus  or  perception  which  releases 
the  latent  possibility  for  this  exchange,  and  as  such  is  the 
touchstone  of  commerce.  Study  will  indicate  that  until 
the  consummation  of  an  exchange  there  are  two  further 
concepts  in  value,  one  the  demand  price  and  one  the 
supply  price,  which  brings  us  to  a  consideration  of 
"price." 

Smart  says:  "Then  we  found  value  naming  itself  in 
something  given  up  and  that  something  in  developed 
civilizations  is  money,  and  price  becomes  the  universal 
expression  of  value.  When  we  conceive  of  price  as  the 
sum  of  money  seeking  after  goods,  it  is  demand,  or  de- 
mand price."  And  further:  "The  sum  we  are  willing 
to  offer,  our  demand  price,  is  confronted  with  and  at 
all  times  affected  by  another  sum  which  seems  independ- 
ent, the  supply  price,  and  this  latter  seems  determined 
by  cost  of  production.  These  two  sides  and  their  mutual 
relation  are  necessary  for  our  complete  theory  of  value." 


DEVELOPMENT  AND  NECESSITY  OF  COSTING     19 

So  it  appears  that  the  processes  of  commercial  ex- 
change operate  by  establishing  an  equilibrium  of  demand 
and  supply  price  and  are  accompanied  by  a  continual  up- 
setting thereof  by  extraneous  conditions  with  the  result- 
ing necessity  of  adjusting  to  equilibrium  anew.  When 
the  point  is  reached  when  demand  price  and  supply  price 
are  interchangeable,  then  business  is  done.  Marshall, 
the  eminent  English  economist  says,  "There  has  been 
long  controversy  as  to  whether  cost  of  production  or 
utility  governs  value.  It  might  as  reasonably  be  dis- 
puted whether  it  is  the  upper  or  lower  blade  of  a  pair  of 
scissors  that  cuts  a  piece  of  paper." 

Eeviewing,  we  have  value  as  the  calculation  form  of 
utility,  price  supplying  the  terms  in  money  for  the  calcu- 
lation, and  this  price  found  to  consist  of  two  component 
forces,  namely,  demand  and  supply,  which  must  come  to 
equilibrium  before  exchange  can  occur.  We  find  supply 
price  resting  upon  the  cost  of  production,  and  therein 
is  established  the  relationship  of  costing  to  the  fabric 
of  economics,  for  costing  is  then  seen  to  be  a  method  of 
determining  the  supply  price  of  a  commodity  and  as  such 
it  becomes  the  actuating  medium  to  exchange  and  the 
whole  flow  of  values  which  constitutes  the  work  of  the 
world. 

Costing  the  Crux  of  Commerce.— Costing  appears, 
therefore,  in  the  light  of  this  exposition,  as  the  crux  of 
commerce,  and  since  the  whole  scheme  of  exchange  is 
predicated  upon  it,  can  there  conceivably  be  any  more 
transcendent  business  function  than  accuracy  in  the  de- 
termination of  the  cost  of  production?  It  requires  but 
little  imaginative  play  to  see  how  false  the  basis  of  ex- 
change becomes  when  the  supply  price  is  incorrect  and 
how  really  precarious  the  entire  structure  of  business 
rests  when  the  sands  of  ignorance  are  seen  beneath. 


20  ESSENTIALS  OF  INDUSTRIAL  COSTING 

This  conclusion  should  not  be  taken  as  to  mean  that 
an  accurate  cost  system  is  indispensable  to  successful 
commercial  activity.  On  the  contrary  the  business  his- 
tory of  the  world  shows  ultimate  success  and  prosperity 
without  adequate  costing,  and  some  approximate  means 
must  have  existed  for  setting  the  price  of  exchange.  Con- 
servative business  organizations  knew  within  reasonable 
accuracy  at  the  end  of  a  year  whether  or  not  they  had 
made  or  lost,  and  so  in  a  very  general  way  they  could 
establish  a  safe  relation  of  their  costs  to  their  prices. 
But  that  this  method  was  successful  in  some  cases  does 
not  remove  the  spectre  of  the  high  mortality  of  which 
they  were  the  survivors  nor  does  it  bring  assurance  to 
the  great  consuming  public  that  if  costs  had  been  known 
definitely  their  expenditures  might  not  have  been  less. 

The  essential  thesis  of  this  chapter  has  been  to  estab- 
lish the  absolutely  vital  necessity  of  accurate  costing 
as  an  indispensable  economic  function.  It  has  further 
been  its  object  to  develop  from  the  historical  side  the 
trend  in  events  which,  though  large  in  outline,  has  never- 
theless converged  with  undeterred  momentum  to  bring 
about  the  modern  institution  of  costing. 

The  wastes  of  the  past  are  gone  beyond  hope  of  sal- 
vage, but  the  pressure  of  life  is  increasingly  toward  a 
higher  standard  of  living.  Everj^  decrease  in  supply 
price  opens  up  new  areas  of  purchasing  capacity  and  so 
increases  demand,  and  the  cj'cle  can  go  on  indefinitely, 
subject  only  to  the  safe  control  that  the  action  is  based 
on  decreased  price  or  cost  of  production. 

Costing  may  now  be  seen  not  only  as  a  desirable  and 
necessary  commercial  institution,  but  as  a  powerful  di- 
recting agent  in  the  vast  scheme  composing  the  economy 
of  existence. 


CHAPTER  II 

THE   PURPOSE  AND  FUNCTION   OF    COSTING 

If  the  world  is  not  governed  by  figures,  they  at  least  show  how 
the  world  is  governed. — McPherson. 

Costing"  Primarily  Concerned  with  Profits.— Although 
service  is  becoming  increasingly  the  motive  of  business, 
this  tendency  should  not  obscure  the  underlying  neces- 
sity of  the  rate  of  return.  Admittedly,  wherever  pos- 
sible, the  considerations  should  be  combined,  but  it  should 
be  understood  that  in  the  end  the  goal  of  enterprise  is 
profit  and  that  the  measurement  of  a  policy  or  method 
is  the  extent  of  profit  in  which  it  results ;  and,  that  funda- 
mentally, the  problem  in  any  commercial  undertaking  is 
to  so  direct  the  capital  engaged  as  to  result  in  a  maximum 
return  on  that  capital. 

It  is,  therefore,  axiomatic  to  say  that  the  function  and 
purpose  of  manufacturing  costs  are  to  contribute  toward 
the  attainment  of  that  objective  and  so  are  primarily 
concerned  with  profits.  The  connection  of  adequate  costs 
and  their  contributing  statistical  data  with  this  necessity 
of  maximum  return  is  immediate  and  direct,  for  it  is 
essentially  a  proposition  of  establishing  price  or  pur- 
chase policies  and  supplying  the  analytical  means  for 
determining  as  immediately  as  possible  the  relation  be- 
tween ''cause  and  etfect"  in  these  policies. 

Costs,  in  order  to  render  this  service,  must  supply 
dependable  data  for  the  computation  of  production  costs, 
and  for  the  basing  thereon  of  prices,  they  should  depict 
the  essential  characteristics  of  a  given  business  and  give 

21 


22  ESSENTIALS  OF  INDUSTRIAL  COSTING 

a  full  description  thereof;  and,  through  process  of  pre- 
senting current  operating  reports,  indicate  the  success  of 
and  direct  the  extension  of  all  controlling  policies.  In 
brief,  costs  should  constitute  the  hygiene  of  corporate 
well-being  and,  therefore,  not  only  govern  the  conduct  but 
also  arrest  habits  or  practices  contrary  to  the  interests 
of  the  business  to  which  they  are  devoted. 

Costing  as  an  Aid  to  Business.— How  a  well  designed 
and  successfully  installed  cost  system  renders  this  assist- 
ance to  business  will  be  explained,  and  as  preliminary 
thereto  the  process  is  briefly  summarized  herewith.  Costs 
contribute  to  the  end  of  profit  by  supplying  service  which 
may  be  best  appreciated  by  specific  mention,  as  follows : 

1.  By  determining  the  rate  of  maximum  return,  or 
by  fixing  prices  for  commodities  which  will  result  in  that 
volume  of  sales  which  will  bring  the  greatest  net  return. 

2.  By  showing  currently  month  by  month  or  oftener 
a  statement  of  operation  indicating  profit  or  loss. 

3.  By  further  division  of  this  current  statement  show- 
ing profit  or  loss  by  products  or  classifications,  or  by 
territories  or  by  salesmen  and  so  govern  the  extension  of 
lines  and  the  promulgation  of  policies. 

4.  By  showing  currently  month  by  month  or  oftener  a 
Statement  of  Condition  or  Balance  Sheet  based  on  this 
operating  statement  and  the  Ledger  balances  after  clos- 
ing out  all  the  usual  accounts  through  the  Profit  and  Loss 
account. 

5.  By  avoiding  unintelligent  competition  and  further- 
ing the  exercise  of  good  business  strategy. 

6.  By  compiling  and  classifying  expenses  so  as  to 
guide  the  internal  control  of  the  business  and  enable  judi- 
cious executive  action  and  budgetary  control. 

7.  By  presenting  data  that  ^vill  permit  of  a  construc- 
tive and  harmonious  wage  policy. 


PURPOSE  AND  FUNCTION  OF  COSTING  23 

Each  of  these  topics  will  be  discussed  in  turn,  and  the 
first  one  is  of  especial  interest,  because,  although  not 
frequently  recognized  and  acted  upon  as  such,  it  is,  at 
least  instinctively,  the  guiding  motive  to  the  general 
price  policy  of  any  business. 

Price  of  Maximum  Return. — Risking  the  tedium  of  pure 
exposition  it  might  be  well  to  present  the  theory  which 
underlies  this  matter  of  maximum  return,  and  then  to 
explain  the  specific  assistance  which  cost  data  may  ren- 
der in  the  practice  of  the  theory.  In  the  first  chapter  the 
transient  equilibrium  between  demand  price  and  supply 
price  was  explained  and  how  the  cost  of  production  should 
properly  fix  the  supply  price  and  so  determine  the  equa- 
tion of  exchange.  But  the  first  chapter  did  not  mention  an 
important  corollary  from  that  relation,  namely,  that  ex- 
change usually  occurs  with  increasing  frequency  as  price 
is  decreased,  and  vice  versa.  This  relation  of  price  and 
volume  has  evolved  the  two  familiar  price  policies  which 
govern  business,  namely,  large  volume  at  small  margin, 
and  small  volume  at  large  margin.  Within  the  limits 
of  the  two  policies  there  are  many  selective  possibilities, 
but  before  considering  the  assistance  of  cost  data  in  de- 
ciding among  them,  it  is  important  to  recognize  the 
ranges  in  profits  which  characterize  different  industries 
and  which  primarily  control  price  setting  and  define  the 
outer  limits  of  the  two  policies  cited  above.  The  rate  of 
profit  which  should  be  added  to  the  cost  of  production 
to  insure  a  proper  return  on  capital  varies  with  the  na- 
ture of  the  business  and  necessarily,  as  will  be  seen,  could 
not  be  uniform  for  all. 

There  are  various  terms  expressing  the  relation  of 
capital  to  that  of  margin  of  profit,  and  ''turnover"  is 
the  familiar  one.  By  ''turnover"  is  generally  meant  the 
activity  of  that  portion  of  the  capital  invested  in  the 


24 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  1. — Tabulation  Showing  Relation  of  Sales  to  Capital  and 


Ratios  of 

Capital 

Sales  to 

Kind  of  Manufacture 

and 

Capital 

Sales 

Surplus 

and 

Surplus 

Steel  company 

$1,990,000,000 
64,000,000 

0.62 

$1,231,000,000 
59,000,000 

Locomotive  company 

0.92 

Meat  packing  company 

120,000,000 

4.80 

575,000,000 

Leather  company   

126,000,000 

0.74 

93,000,000 

127,000,000 

70,000,000 

62,000,000 

Rubber  company   

206,000,000 

132,000,000 

58,000,000 

0.61 

Tobacco  company 

0.53 

Motor  car  company 

1.06 

inventory.  The  frequency  of  turnover  is  an  important 
factor  in  the  question  of  the  margin  of  profit,  but  it  is 
not  the  all  controlling  one.  It  represents  but  a  part  of 
the  enterprise's  assets,  but  not  the  entire  wealth  or 
resources  engaged  in  a  given  business.  It  is  necessary, 
therefore,  to  go  beyond  the  turnover  and  consider  the 
relationship  which  gross  sales  bear  to  the  capital  in- 
vested, in  a  well  conducted  and  normal  manufacture  of 
a  given  kind.  Accordingly,  as  part  of  this  discussion, 
there  have  been  tabulated  the  following  data  (Figure  1) 
which  show  for  various  industries  the  following : 

1.  Gross  margin  of  profit  on  sales. 

2.  Ratio  of  gross  sales  to  the  total  capital  invested. 

3.  The  equivalent  of  the  gross  profit  expressed  in 
rate  of  return  on  the  capital. 

Instead  of  considering  merely  that  part  of  the  capital 
represented  in  inventory  the  whole  capital  investment 
is  placed  in  relation  to  sale,  and  it  is  found  that  the  turn- 
over as  thus  computed  varies  from  as  low  as  0.53  in  the 
case  of  a  tobacco  company  to  4.8  in  the  case  of  a  meat 
packing  company.     It  is  obvious  from  this  tabulation 


PURPOSE  AND  FUNCTION  OF  COSTING  25 

Surplus,  Turnovers  of  Inventory,  Etc.,  in  Selected  Industries 


Gross 

Per  Cent 
Gross 

Per  Cent 

Gross 
Profit  on 

Total 

Number 
of   Turn- 
overs of 
Inventory 
in  Sales 

Per  Cent 
Inven- 

Profit 

Profit  on 
Sales 

Capital 

and 
Surplus 

Inventory 

tory  to 
Gross 
Sales 

$343,000,000 

27.0 

16.7 

$182,000,000 

6.8 

14.8 

6,300,000 

10.6 

9.8 

19,600,000 

3.0 

33.2 

20,465,000 

3.5 

16.8 

74,900,000 

7.7 

13.0 

17,300,000 

18.6 

13.8 

56,500,000 

1.6 

60.7 

147,000,000 

11.6 

7.1 

48,500,000 

2.6 

38.2 

8,700,000 

12.4 

6.6 

40,500,000 

1.7 

57.9 

8,600,000 

13.9 

14.8 

21,500,000 

2.9 

34.7 

that  any  question  of  legitimate  or  required  profit  on  sales 
must  involve  a  consideration  of  the  rate  of  turnover 
of  the  entire  capital,  for  it  is  the  rate  of  turnover  on 
capital  which  largely  determines  capital  value. 

Prices  and  Competition.— From  the  foregoing  is  ap- 
parent the  process  for  determining,  in  the  case  of  any 
industry,  the  approximate  rate  of  profit  which  must  be 
added  to  the  production  cost  to  arrive  at  a  definite  return 
on  capital.  If,  however,  the  entire  affair  of  insuring  this 
return  on  capital  were  as  simple  as  that,  business  would 
not  be  difficult  to  conduct;  as  it  is,  however,  the  play  of 
competitive  forces  bears  heavily  on  price,  and  hence,  by 
deduction,  profit.  It  is  this  fact  of  competition  which 
stresses  the  importance  of  the  selection  of  a  price  policy 
and  which  presents  opportunity  to  costing  of  serving  in 
its  highest  function.  This  function  may  be  briefly  stated 
as  the  supply  of  data  which  will  assist  in  negotiating  in 
a  competitive  market  the  productive  capacity  of  a  given 
plant  as  represented  in  its  commodity  output  so  as  to 
secure  that  volume  of  sales  at  those  prices  which  will 
result  in  the  greatest  aggregate  return  on  the  capital. 


26  ESSENTIALS  OF  INDUSTRIAL  COSTING 

It  is  not  an  easy  affair  to  wrest  from  a  heavily  con- 
tested trading  demand  the  vohime  at  the  prices  as  de- 
scribed above,  and  failures  and  shortcomings  are  experi- 
enced and  success  is  a  matter  of  fortune  as  well  as  of 
fine  calculation.  There  are  numberless  cases  where,  in 
pursuit  of  larger  sales  totals,  orders  have  been  booked 
at  prices  which  left  little  addition  to  the  profits,  and 
there  are  many  instances  where  insistence  upon  price 
has  brought  volume  to  an  almost  unprofitable  minimum. 

The  significance  of  this  discussion  has  lost  point  some- 
what, due  to  the  abnormal  demand  of  the  war,  and  it  is 
necessary,  therefore,  to  recall  conditions  prior  to  the 
war  and  which  are  sure  to  be  paralleled  in  the  future. 
The  average  plant  before  the  war  had  capacity  beyond 
its  sales  demand  and  in  support  of  this  assertion  the 
following  information  is  cited  in  the  case  of  New  Jersey, 
which  is  a  typical  industrial  state,  and  in  preface  thereto 
the  following  excerpt  from  an  editorial  of  the  New  York 
Times  of  date  prior  to  1914  is  quoted : 

It  is  generally  recognized  that  the  manufacturing  capacity  of 
the  industrial  plants  in  this  country  is  much  in  excess  of  the 
needs  of  the  population.  The  excess  varies  in  different  lines, 
but  the  general  average  has  been  put  at  about  25  per  cent. 

Effect  of  Excess  Capacity.— With  this  fixed  invest- 
ment and  the  definite  knowledge  that  total  producing 
capacity  exceeded  total  demand,  the  essence  of  success 
was  contained  in  those  deliberations  which  settled  the 
price  basis.  With  this  in  mind,  the  question  arises  as 
to  the  procedure  for  ascertaining  such  a  price  basis  and 
in  what  manner  cost  data  contribute  to  the  solution  of 
the  problem. 

It  must  be  admitted  at  once  that  cost  data  alone  will 
not  suffice  in  a  decision  of  this  kind,  because  the  finer 
limits  of  price  are  matters  of  judgment  more  than  fact. 


PURPOSE  AND  FUNCTION  OF  COSTING 


27 


Average  Percentage  op  Capacity  Employed  in  Various  Industries 

IN  New  Jersey 


Brick  and  terra  cotta  . . 

Electrical  appliances  . . . . 

Furnaces,  ranges  and 
heaters  

Leather,  tanned  and  fin- 
ished   

Machinery   

Paper 

Pottery 

Rubber  goods,  hard  and 
soft  

Silk  (bi'oad  and  ribbon 
goods) 

Steel  and  iron  (construc- 
tion )    

Woolen  and  worsted  goods 

Twenty-five  industries. 


1913   1912 

73.50 
68.53 

74.23 

72.62 
69.38  j  70.37 
83.62  83.94 
73.04  79.26 


75.35 
69.71 

85.94 

72.50 


76.34 
61.75 


77.91 
70.87 


65.27  65.74 
83.75!  85.89 


1911 


70.30  73.28 


72.46 
67.94 

69.37 

71.88 
65.68 
83.97 
75.65 

78.77 

71.26 

58.00 

77.78 


1910 


72.10 


76.23 
70.42 

74.69 

75.48 
68.40 
88.12 
78.18 

77.80 

73.65 

64.42 
6.40 


1909 


71.62 
64.26 

71.92 

76.75 
66.76 
85.75 
77.09 

77,39 


1908 


55.30 
55.63 

57.69 

67.80 
56.92 
80.53 
41.88 

67.67 


76.23  71.02 

67.83 159.78 
84.38 174.42 


1907 


74.00    73.10  65.57 


75.29 
68.03 

77.14 

77.00 
75.11 

87.76 
74.54 

78.87 

78.26 

75.00 
81.38 

77.36 


They  are  a  presumption  based  upon  intimate  knowledge 
of  trading  conditions  and  their  success  is  in  a  large  part 
a  matter  of  personnel,  but  costs  should  and  can  supply 
information  which  supports  judgment  and  should  be  to 
an  industrial  executive  what  a  well  organized  intelligence 
service  is  to  an  army.  The  chief  service  of  cost  data  in 
an  inquiry  of  this  kind  is  to  delineate  those  constituents 
of  unit  costs  which  fluctuate  with  volume. 

In  this  connection  it  might  be  well  to  describe  those 
elements  in  cost  and  the  extent  to  which  prices  would 
be  weighted  relatively  according  to  the  degree  of  pro- 
ductive activity.  Two  elements  in  costs,  that  is,  direct 
labor  and  material,  generally  are  fixed  items  and  de- 
crease or  increase  in  direct  ratio  with  volume,  but  the 
remaining  factor,  expense — overhead — or  burden,  as  it  is 
variously  known,  contains  some  important  elements 
which  are  fixed  by  nature  and  which,  therefore,  vary  in 
the  amount  of  their  unit  le\^  in  cost  dependent  upon 


28  ESSENTIALS  OF  INDUSTRIAL  COSTING 

the  volume  of  production  over  which  their  total  must  be 
distributed.  As  illustration  of  the  character  of  such  ex- 
penses might  be  cited  depreciation,  taxes,  interest  (if 
admitted  into  costs),  administrative  salaries,  office  and 
shop  executive  salaries,  to  large  extent  power,  heat,  and 
light,  and,  in  general,  the  expenses  incident  to  the  con- 
duct of  a  plant  as  a  going  concern.  These  items,  though 
differing  in  proportion  to  total  expense,  according  to  the 
business,  are  considerable  in  amount  if  not  predominant. 

It  is  these  elements  in  expense  which  govern  price 
fixing,  and  price  fixing,  therefore,  presupposes  a  clear 
cut  delineation  in  the  records  of  expense;  and  methods 
of  accumulation  and  presentation  of  the  facts  which  are 
readily  accessible,  flexible,  and  possible,  not  only  of  easy 
resolution  to  their  constituent  parts,  but  also  of  uniting 
these  parts  in  such  combination  and  distribution  as  may 
be  needed  for  the  calculation.  When  expense  is  sub- 
divided and  classified  in  this  manner  it  is  then  a  matter 
of  straight  computation  to  determine  the  influence  of 
expense  or  any  part  of  it  upon  price  in  proportion  with 
volume  of  sales. 

Current  Statements  of  Operation.— The  second  use  of 
costs  in  furthering  profits  is  to  furnish  correct  state- 
ments of  operation  indicating  profit  or  loss.  In  most 
manufactures  to-day  the  profit  or  loss  on  operation  ac- 
tually is  unknown  until  the  end  of  the  fiscal  year,  when 
an  inventory  is  taken,  the  books  closed,  and  the  state- 
ments drawn  off.  This  condition  is  so  general  and  com- 
monly accepted  that  its  shortcomings  and  risks  have 
been  overlooked  and  security  taken  chiefly  in  the  fact 
of  the  universal  custom  which  it  represents.  Yet  to  any- 
one who  has  been  supplied  with  more  immediate  advice 
on  operation — let  us  say,  a  monthly  report — the  egre- 
gious insufficiency  of  the  older  practice  is  staggering. 


PyRPOSE  AND  FUNCTION  OF  COSTING  29 

Developments  and  inventions  have  been  increasing  the 
velocity  of  business  transactions  with  such  speed  that  a 
report  showing  results  at  the  end  of  the  year  is  nothing 
short  of  an  astonishing  anachronism,  particularly  as 
there  is  no  convincing  reason  why  any  manufacturer 
should  be  without  a  monthly  financial  record  indicating 
the  amount  of  profit  or  loss  for  that  period.  The  ac- 
counting process  on  which  such  a  statement  rests  is  sim- 
ple, as  will  be  established,  and  will  be  explained  herewith. 

A  traditional  statement  of  profit  based  upon  the  state- 
ment of  a  physical  inventory  might  be  briefly  repre- 
sented, as  shown  in  part  1  of  Figure  2. 

As  will  be  noted,  the  inventory  at  the  beginning  is 
listed  and  the  payroll  and  raw  materials  used  and  ex- 
pense for  the  year  added  to  it.  The  inventory  at  the 
end  of  the  period  is  then  deducted,  the  balance  remain- 
ing, therefore,  being  the  presumed  cost  of  the  material 
or  product  which  has  been  shipped  and,  for  that  reason, 
designated  as  the  cost  of  sales. 

The  manner  of  determining  current  statements  of 
operation  by  months  (illustrated  in  part  2  of  Figure  2) 
is  in  direct  opposition  to  this  method  and  is  based  upon 
the  extension  of  the  quantity  of  the  products  or  com- 
modities sold  by  their  manufacturing  cost.  The  proof 
of  the  accuracy  of  the  monthly  statement,  therefore,  is 
contained  in  the  closeness  with  which  the  physical  inven- 
tory taken  at  the  end  of  the  year  checks  with  the  inven- 
tory which  this  method  of  establishing  profit  indicates. 
In  a  word,  to  the  Goods  in  Process  inventory  at  the  be- 
ginning of  the  period  is  added  the  current  consumption 
of  raw  material,  and  productive  labor  and  expense  and 
the  cost  of  sales  is  deducted  from  this  total  which,  neces- 
sarily, leaves  the  presumed  Process  inventory,  and  this 
inventory  can  be  checked  at  any  time  against  the  physical 


30  ESSENTIALS  OF  INDUSTRIAL  COSTING 

inventory  in  proof  of  the  relative  accuracy  of  the  profit, 
as  indicated  by  this  statement. 

This  describes  the  manner  in  which  cost  data  permit 
of  such  timely  assistance  as  statements,  monthly  or 
oftener,  with  proof  of  accuracy  as  described  in  the  Proc- 
ess inventory  which  must  agree  within  fine  limits  with 
the  inventory  taken  at  the  end  of  the  year.  Of  course, 
this  method  depends  upon  accurate  costs,  but  it  should 
also  be  remembered  that  the  pricing  or  valuing  of  a  phys- 
ical inventory  in  the  traditional  practice  was  work  de- 
manding similar  information,  and  since  this  information 
was  not  usually  available,  it  develops  that  the  data  on 
which  the  statement  itself  rested  were  insecure. 

Hence,  not  only  was  the  former  method  belated  in  its 
completion,  but  inaccurate.  For,  in  order  to  price  a 
physical  inventory  properly,  the  cost  of  process  goods 
at  all  intermediate  operations  is  necessary  and  this  can- 
not be  done  without  a  dependable  cost  system.  If,  there- 
fore, cost  data  are  accumulated  for  this  purpose,  it  is 
but  a  short  step  further  to  compile  a  current  statement 
by  deducting  from  the  sales  the  cost  of  sales.  The  full 
detail  of  the  accumulation  of  such  statements  and  their 
connection  with  the  general  books  will  be  considered  in 
a  later  chapter. 

Classified  Statements  of  Operation.— Operating  state- 
ments of  this  kind  and  frequency  are  indicative  of  man- 
agerial success,  as  well  as  depicting  the  trading  condi- 
tions of  a  given  period  or  periods.  A  further  extension 
of  this  statement  which  should  logically  be  made  is  to 
show  the  profit  classified  by  products.  Possibly  no  better 
aid  exists  to  the  wise  setting  of  prices  or  wise  additions 
to  a  line  than  an  analysis  of  the  resulting  profits  by 
items  of  classifications  within  the  line.  It  is  a  sure 
telltale  to  policy  and  ability,  and  reflects  results  in  dol- 


PURPOSE  AND  FUNCTION  OF  COSTING  31 

FiGURK  2. — Abridged  Statement  op  Operation  Showing  Contrast  in 
Method  op  Computing  Profit  prom  Cost  op  Sales  and  prom  In- 
ventory Diffe:rences  : 

1.  Profit  Derived  from  Inventory  Differences: 

Sales   $221,000.00 

Less  allowances  1,000.00 

Net  sales $220,000.00 

Materials  used  $33,000.00 

Productive  labor   70,000.00 

Manufacturing  expense   ....       85,000.00 
Total  materials  used,  productive  labor  and 

manufacturing-  expense    $188,000.00 

Inventory    at   beginning   of   period    ....       160,000.00 

Inventory    at   beginning   of   period    plus 

additions    $348,000.00 

Inventory  at  end  of  period 163,000.00 

Cost  of  Sales  $185,000.00 

Manufacturing  profit    35,000.00 

2.  Profit  Derived  from  Cost  of  Sales : 

Sales   $221,000.00 

Less  allowances   1,000.00 

Net  sales  $220,000.00 

Materials  used   $33,000.00 

Productive  labor   70,000.00 

Manufacturing  expense 85,000.00 

Total  materials  used,  productive  labor  and 

manufacturing  expense $188,000.00 

Inventory  at  beginning  of  period    ....       160,000.00 

Inventory    at   beginning   of    period   plus 

additions   $348,000.00 

Cost  of  sales $185,000.00     $185,000.00 

Inventory  at  end  of  period  163,000.00 

Manufacturing  profit  $35,000.00 

Cost  of  sales  is  subtracted  in  second  case.  Inventory  at  end  is  sub- 
tracted in  first  ease.  Materials  used  is  derived  in  a  similar  manner  and 
with  similar  inversion  between  the  two  methods, 

lars  and  cents  which  is  the  common  measure  of  business 
success. 

It  is  abnost  a  platitude  to  say  that  any  business  with 
a  wide  and  varied  line  experiences  varying  rates  of  profit 


32  ESSENTIALS  OF  INDUSTRIAL  COSTING 

over  the  line,  and  unless  these  differences  are  set  out  in 
relief  against  the  total  volume  of  which  they  are  a  part, 
futile  efforts  are  apt  to  be  expended  unconsciously,  and 
the  satisfying  profit  of  one  year  may  be  changed  to  an 
unexpected  decrease  the  next.  Repeatedly,  manufac- 
turers have  said,  "What  avail  are  costs,  detailed  by 
items  in  the  line,  when  certain  articles  are  sold  as  bread 
and  butter  business,  or  possibly  only  as  bread  on  the 
water?  They  are  demanded  by  the  trade  and  must  be 
supplied  if  the  other  profitable  articles  are  to  be  sold." 
This  attitude  is  somewhat  akin  to  the  business  philosophy 
which  brought  one  of  the  Potash  and  Perlmutter  part- 
ners to  say  in  scorn:  '*Yes,  to  the  devil  mth  expenses, 
we  have  lots  of  them,"  and  it  resembles  the  ostrich  in- 
stinct to  confuse  blindness  with  safety.  It  is  impossible 
to  pronounce  with  sufficient  emphasis  that,  when  trading 
limitations  of  that  kind  exist,  the  necessity  for  accurate 
report  of  the  actual  loss  is  even  greater  than  would  be 
required  if  the  margin  were  more  liberal,  and  whether 
or  not  such  conditions  exist,  a  statement  of  profit  sub- 
divided by  items  or  classes  of  items  in  the  line  is  one  of 
the  chief  contributions  of  costs  to  successful  manufac- 
turing operation.  Frequently,  these  statements  are  classi- 
fied by  salesmen  or  territories  and  the  distribution  of 
profit  by  those  divisions  is  shown,  the  benefit  of  which 
will  be  apparent  to  any  sales  executive  who  has  developed 
either  an  organization  or  various  territories. 

Current  Statements  of  Condition.— The  fourth  manner 
in  which  cost  data  serve  the  cause  of  good  management 
is  by  the  current  construction  of  a  balance  sheet,  or  a 
statement  of  condition,  the  form  of  which  is  illustrated  in 
Figure  3.  A  balance  sheet  differs  from  a  profit  and  loss 
statement  in  that  the  latter  shows  the  profit  on  sales, 
while  the  former  shows  the  resultant  net  worth  of  the 


PURPOSE  AND  FUNCTION  OF  COSTING 


33 


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34  ESSENTIALS  OF  INDUSTRIAL  COSTING 

business.  A  balance  sheet  shows  the  distribution  of  in- 
vested capital  and  the  current  additions  to  surplus  re- 
sulting from  profit.  The  balance  sheet  is  simply  a  tabu- 
lation of  the  balances  of  those  accounts  which  remain 
when  all  other  accounts  have  been  closed  out  through 
profit  and  loss.  It  reflects  the  degree  of  success  with 
which  the  capital  has  been  invested  and  in  combination 
with  the  profit  and  loss  statement  furnishes,  if  properly 
compiled,  all  the  data  essential  to  a  critical  considera- 
tion of  the  operating  and  financial  condition  of  a  corpora- 
tion at  the  time,  and  by  comparison  with  similar  state- 
ments for  other  periods  presents  a  panorama  of  its  cumu- 
lative vicissitudes,  its  successes,  or  its  failures. 

Prevention  of  Destructive  Competition.— The  fifth  man- 
ner in  which  it  is  the  function  and  purpose  of  costs  to 
serve  is  by  avoiding  unintelligent  competition  and  by  en- 
abling the  exercise  of  intelligent  business  strateg}".  The 
law  of  supply  and  demand  is  an  inexorable  condition  of 
business  activity  and  it  has  been  the  classic  assumption 
of  economists  that  its  free  operation  was  suflScient  con- 
trol for  all  commercial  endeavor,  the  argument  offered  in 
support  being  that,  if  supply  decreased  when  margin  in- 
creased, more  capital  would  be  invested,  the  supply  in- 
creased and  thus  reduction  in  margins  induced.  If  this 
balance  of  supply  and  demand  was  maintained  without 
serious  sacrifice,  its  success  would  be  beyond  question,  but 
unfortunately,  its  results  are  not  obtained  without  a  toll 
too  sizeable  to  overlook. 

It  so  happens  that  demand  is  fickle  and  that  frequently, 
in  fact,  Tvith  almost  cyclical  regularity,  supply  exceeds 
demand,  and  at  such  times  competition  becomes  merci- 
less and  cut-throat  and  the  failures  in  which  it  results 
fasten  a  heavy  burden  on  the  country.  Hence,  it  has 
been  one  of  the  interesting  phases  of  cost  development 


PURPOSE  AND  FUNCTION  OF  COSTING  35 

to  observe  that,  as  better  knowledge  of  actual  costs  and 
producing  factors  was  acquired,  the  suicidal  quality  of 
these  competitive  orgies  became  less  prominent  and  saner 
measures  followed.  It  was  seen  that  ignorance  of  facts 
had  brought  about  desperate  heedlessness  to  the  shaping 
of  policies  and  that,  frequently,  competitive  action  was 
like  striking  in  the  dark,  the  futility  and  destructive  force 
of  which  were  shown  in  the  clear  light  of  definite  informa- 
tion which  costs  furnished.  Gradually  it  was  learned 
that  those  manufacturers  who  were  guided  by  sufficient 
financial  information  met  and  withstood  the  recurring 
periods  of  depression  with  greater  success  and  then,  that 
the  more  general  this  information  was  available  to  all 
companies  in  an  industry  the  better  that  industry  as  a 
whole  weathered  the  gale. 

In  a  word,  accurate  cost  knowledge  within  an  indus- 
try as  a  whole  restrained  individual  companies  from 
actions  intended  for  self-protection,  but  springing  from 
an  ignorance  of  the  forces  opposing  and  in  the  end 
actually  harmful  to  the  plant  and  to  the  industry  as  a 
whole.  Costs  stake  the  limits  of  price  beyond  which 
profit  ends  and  so  bring  competition  to  the  sane  basis  of 
a  trial  of  relative  physical  strength  and  efficiency  of  vari- 
ous plants,  and  not  an  endurance  test  with  bankruptcy  as 
the  result.  For  with  accurate  cost  knowledge  at  hand 
no  executive  could  act  in  the  matter  of  price  without  ad- 
vance knowledge  of  the  degree  of  financial  jeopardy  in 
which  his  decision  would  result. 

Statistical  Operating  Control.— The  sixth  service  of 
cost  data  as  listed  in  the  outline  introducing  this  chapter 
is  to  compile  data  reflecting  true  operating  efficiency  and 
to  classify  expense  so  as  to  guide  management.  There 
are  men  who,  by  long  intimacy  and  close  contact  with 
operating    conditions,    can    measure    instinctively    the 


36  ESSENTIALS  OF  INDUSTRIAL  COSTING 

operating  condition  of  a  plant,  and  to  whom  a  given  busi- 
ness is  the  fabric  of  their  very  being. 

Unquestionably  such  men  are  indispensable  and  their 
advice  invaluable,  but  the  risks  of  depending  so  com- 
pletely on  the  human  factor  are  great.  Further,  as  the 
size  of  plants  increases  comprehension  of  their  operating 
details  exceed  human  limits  unless  supplemented  by  other 
methods  of  intelligence.  Nothing  has  yet  been  devised 
which  so  successfully  supplies  this  control  as  a  well- 
designed  cost  system,  the  elements  of  which  represent 
sufficiently  detailed  analysis  and  sufficiently  clear  presen- 
tation and  flexible  accumulation  of  the  various  factors 
composing  the  cost  of  production.  It  is  in  this  function 
that  cost  information  takes  on  the  full  character  of  sta- 
tistics and  what  has  prompted  the  quotation  that  is  at 
the  head  of  this  chapter,  namely,  ''that  if  the  world  is 
not  governed  by  figures,  they  at  least  show  how  the 
world  is  governed. ' ' 

As  illustration  of  this  there  is  shoAvn  herewith  (Figure 
4)  from  the  expense  analysis  of  a  certain  plant  one  of  the 
tabulated  expense  records  of  one  of  the  various  depart- 
ments. Herein  is  seen  the  full  cost  of  maintaining  that 
department  as  independently  as  if  it  were  a  separate 
institution.  It  shows  the  relation  of  expense  to  labor, 
the  variations  in  the  relations  through  the  months  and 
comparatively  with  the  previous  year,  and  is  discussed 
in  full  in  Chapter  IX.  Attention  is  directed  to  it  here 
simply  because  of  its  statistical  value,  aside  from  its  con- 
tribution to  costing.  This  record  supplies  data  pertain- 
ing to  a  department  in  such  form  and  completeness  that 
the  department  can  be  regarded  virtually  as  a  separate 
plant  with  its  own  equivalent  fixed  charges,  etc.  The 
record  can  also  be  utilized  to  show  such  data  as  appear 
at  the  bottom  of  the  sheet,  where  the  average  hourly  rate, 


EXPENSE  ANALYSIS 

#23 

SPRING  ASSEMBLY  BEPT. 

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Figure    4, — specimen    sheet   from    expense   analysis    indicating  thb 

accumulation  of  expense  for  a  selected  department 

37 


38  ESSENTIALS  OF  INDUSTRIAL  COSTING 

the  turnover,  the  production  per  man,  and  the  average 
cost  may  be  compared  monthly. 

Statistics  of  this  kind  are  invaluable  and  serve  to  guide 
the  management  in  a  way  which  cannot  be  fully  appre- 
ciated until  experienced. 

There  are  devotees  of  shirtcuff  calculations  who  scoff  at 
the  details  and  intricacies  to  which  a  fine  development  of 
cost  analysis  may  be  carried,  but  Tv^thout  disparage- 
ment to  such  individuals,  their  admitted  ability,  though 
successful,  would  be  enhanced  and  secured  by  the  records 
just  described. 

Costing  as  Basis  of  Budget. — Costs  also  supply  the 
basis  of  fixing  a  budget,  a  device  used  in  modem  control 
of  expenditures.  The  budget  is  an  intelligent  estimate 
of  probable  expenditures,  it  indicates  the  financial  re- 
quirements that  are  to  be  met,  sets  a  definite  limit  upon 
appropriations  and  serves  as  a  standard  for  comparing 
the  trend  in  current  expenses  vrith.  normal.  The  use  of 
the  budget  system  is  increasing,  for  its  usefulness  is  rec- 
ognized wherever  it  is  tried,  and,  while  more  familiar 
in  connection  with  governmental  expenditures,  it  is  of 
tremendous  value  in  any  fiscal  undertaking  and,  there- 
fore, applies  to  manufacture  as  well. 

Costing  and  Labor  Management.— The  management  of 
labor  has  always  been  the  keystone  to  the  arch  of  indus- 
trial stability,  and  the  war  simply  served  to  etch  out  the 
fact  from  the  background  of  past  obscurity.  The  factory 
system  was  a  rapid  development,  the  handling  of  men 
in  large  bodies,  its  essential  quality,  was  an  unknown 
and  the  chasm  in  output  between  satisfied  and  misunder- 
standing employees  was  not  conceived.  The  relation  be- 
tween production  and  "pay,"  which  is  the  essence  of 
costing,  was  unexplored  and  so,  vast  latent  possibilities 
remained  dormant,  like  that  of  steam  until  its  substance 


PURPOSE  AND  FUNCTION  OF  COSTING  39 

was  touched  by  the  imagination  of  Watt.  And  so  for 
years  wages  continued  on  the  dead  level  of  day  rate,  until 
progressive  minds  devised  the  various  differential  sys- 
tems, all  of  which  operate  through  payment  scaled  ac- 
cording to  production. 

A  wage  system  or  adjustment  of  any  kind  cannot  be 
made  advantageously  without  the  full  knowledge  of  the 
anatomy  of  the  wage  fund  which  the  dissection  of  a  cost 
system  furnishes.  In  fact,  no  executive  is  in  position  to 
adjust  wages  equitably  to  his  directors  or  to  the  em- 
ployees unless  he  is  supplied  with  data  which  at  least  in- 
dicate the  causal  relation  between  unit  cost  and  increased 
wage.  Costs  supply  this  information,  and  although  no 
reports  are  available  to  sustain  his  opinion,  I  believe 
that,  during  the  last  five  years  of  continued  wage  un- 
settlement,  those  companies  succeeded  best  in  the  try- 
ing conditions  who  had  adequate  costs  and  who  knew 
thereby  the  limits  as  well  as  the  effects  of  their  action  in 
the  matter  of  wage  policy. 

The  purpose  and  function  of  costs  have  been  outlined 
at  some  length,  and  reduced  to  their  very  pith  it  may  be 
said  they  serve  simply  to  supply  intelligence  and  to 
illuminate  operating  conditions  which  might  otherwise 
be  obscured.  The  particular  form  of  their  benefit  has 
almost  infinite  phases.  The  essential  ones  have  been  dis- 
cussed, but  knowledge  of  costing  is  comparable  to  that 
of  language  in  that  a  grasp  of  the  rudiments  through 
practice  alone  can  reach  to  higher  and  higher  expression. 
Obviously  any  refinement  or  extension  in  the  use  of  cost- 
ing must  be  justified  by  commensurate  commercial  value. 
Monthly  operating  statements,  statements  of  condition, 
classified  or  unclassified,  abstracts  and  analyses  of  ex- 
penses, wage  policies,  are  simply  the  familiar  and  tra- 
ditional forms  of  business  intelligence,  and  also  impor- 


40  ESSENTIALS  OF  INDUSTRIAL  COSTING 

tant  ones,  and  hence  they  have  been  discussed  at  some 
length. 

Costing  as  Red  Tape.— There  is  not  as  much  recognition 
of  the  benefit  of  costs  to  industrial  operation  as  there 
should  be,  and  many  who  recognize  the  trend  in  economic 
forces  and  who  admit  the  practical  value  of  costs  refrain 
from  action  because  of  the  deep  rooted  distrust  which 
surrounds  system  and  which  may  be  better  described  as 
an  instinctive  apprehension  of  all  that  the  term  ''red 
tape"  signifies. 

There  is  a  very  real  fear  that,  while  costs  are  valuable, 
even  desirable,  their  necessity  does  not  surmount  the 
objection  of  too  great  expense  of  operation  or  installa- 
tion. The  belief  often  encountered  is  that  the  risks  of 
loss  through  inadequate  costing  do  not  justify  the  pre- 
mium which  has  to  be  paid  in  the  form  of  the  clerical 
expense  required  to  operate  a  cost  system.  There  can  be 
no  quarrel  with  this  attitude.  It  is  simply  another  case 
of  judgment  where  the  speculative  element  might  easily 
justify  any  contention  or  policy. 

There  is,  however,  much  magnifying  of  the  actual  ex- 
pense of  cost  operation  and  much  ignorance  of  the  facts, 
because  of  which  it  may  not  be  amiss  to  present  a  few 
definite  figures  on  the  subject.  It  is  not  possible  to  state 
a  figure  which  wiU  apply  wdthout  exception,  but  it  is  pos- 
sible to  approximate  closely  and  to  give  a  dependable 
basis  upon  which  to  measure  the  worth  or  financial  ex- 
pediency of  such  equipment  as  costing. 

In  the  first  place,  the  function  of  costing  protrudes 
into  several  other  department  records  and  it  is  not  pos- 
sible to  establish  precisely  the  boundary  where  the  ex- 
pense of  costing  begins  and  the  expense  of  the  other  serv- 
ice ends.  For  instance,  every  plant  requires  a  payroll 
clerk  or  department  and  practice  varies  as  to  the  extent 


PURPOSE  AND  FUNCTION  OF  COSTING  41 

of  the  information  collected  by  such  a  department.  Costs 
require  the  payroll,  but  they  also  require  a  finely  detailed 
analysis  or  distribution  of  this  payroll.  In  some  plants 
this  distribution  would  be  regarded  as  a  payroll  expense, 
and  a  common  practice  of  the  plant,  whereas  if  it  were  in- 
formation required  and  only  developed  for  the  costs,  it 
would  be  regarded  as  an  expense  for  developing  costs. 

Costs  also  rest  upon  the  production  system  and  are 
aided  or  complicated  according  to  the  extent  and  method 
of  production  control.  Costs  further  require  a  distribu- 
tion of  invoices  and  sales  and,  frequently,  a  reclassifica- 
tion of  accounts  and  quite  an  increase  in  the  number  of 
closing  journal  entries  each  month.  From  all  of  this  may 
be  seen  the  extent  to  which  costs  overlap  or  transfuse 
with  other  operating  records  and  why  it  is  difficult  to 
ascertain  that  portion  of  the  entire  expense  of  maintain- 
ing all  these  records  which  may  properly  be  charged  to 
costs. 

Costing  as  a  Business  Expense.— However,  it  may  be 
stated  with  full  reservation  for  variation  and  mdest  dif- 
ference in  individual  cases  that  costs  (and  by  that  is 
meant  the  system  of  collection  of  all  data  required  for 
statements  connected  with  the  general  books)  range  from 
one-quarter  of  one  per  cent  to  one  per  cent  of  total  ex- 
pense. There  are  some  cases  where  this  is  exceeded,  but 
by  and  large  these  figures  are  fair  and  representative. 
Personally,  I  do  not  know  of  a  single  installation  of  ade- 
quate design  which  cannot  easily  offset  this  expense  by 
saving  in  other  expenditures  which  saving  otherwise 
would  not  be  made.  This  states  the  fact  modestly,  for  it 
is  usually  the  case  that  costs  bring  greater  results  and 
have  often  prevented  insolvency  and  very  often  have  in- 
creased profits  many  times  beyond  what  otherwise  would 
have  been  their  amount. 


42  ESSENTIALS  OF  INDUSTRIAL  COSTING 

Managers  will  frequently  accept  increases  to  non-pro- 
ductive labor  in  the  factory  as  an  unquestionable  physical 
necessity,  and  tolerate  additions  to  expense  in  this  man- 
ner, yet  will  decline  to  incur  the  additional  clerical  ex- 
pense of  costing.  In  a  word,  the  usual  expense  of  cost- 
ing is  a  small  proportion  of  total  expense  and  yet,  fre- 
quently, it  meets  strenuous  objection,  when  other  expenses 
equal  or  far  greater  in  extent  are  accepted  without  scru- 
tiny. 

In  conclusion,  it  is  my  conviction  that  a  properly  de- 
signed and  operated  cost  system  should  be  and  is  a  legiti- 
mate and  relatively  minor  business  expense  which  no 
plant  can  evade  on  the  grounds  of  economy.  This  con- 
clusion is  subject  only  to  the  observation  that  a  cost  sys- 
tem is,  like  any  machine  or  equipment,  valueless  if  not 
intelligently  used. 


CHAPTER  III 


THE    MECHANISM   OF   COSTING 


Mechanism :  In  general  the  means  or  mode  by  which  particular 
effects  are  produced  or  purposes  accomplished. — Century  Dictionary. 

Definition  of  a  Cost. — A  cost  is  a  financial  evaluation  of 
a  physical  fact  and  from  this  definition  may  be  under- 
stood the  essential  connection  which  exists  between  the 
form  of  the  cost  system  and  the  character  of  the  manu- 
facture. 

The  evaluation  is  simply  a  method  of  the  measurement 
of  the  processes  necessary  for  or  resulting  in  a  given 
product  expressed  in  terms  of  money.  It  is  obvious,  then, 
that  the  processes  of  manufacture  and  the  character  of 
the  product  decide  to  a  considerable  degree  the  type  or 
design  of  the  cost  system.  Indeed  the  character  of  the 
productive  processes  is  the  paramount  influence  on  cost- 
ing design,  and  in  the  whole  gamut  from  needles  to  loco- 
motives and  embroidery  to  oleomargarine,  classification, 
as  may  be  imagined,  is  a  difficult  procedure. 

Costing  Systems.— The  essential  systems  of  costing  are 
two,  namely, 

Single  and 
Multiple 

Single  costs,  as  might  be  inferred,  refer  to  production 
where  there  is  one  determinate  unit,  identical  and  uni- 
form in  the  raw  material,  and  the  operations  required 
for  its  manufacture. 

43 


44  ESSENTIALS  OF  INDUSTRIAL  COSTING 

Multiple  costs  apply  to  manufacture  where  units  exist 
but  are  dissimilar  as  to  material  and  labor  requirements, 
and  that  frequently  bear  little  if  any  relationship  in  the 
operations  required  for  their  production. 

The  single  system  is  simple  and  operates  by  accumu- 
lating the  total  expenditures  for  a  desired  period  and 
dividing  them  by  the  units  produced.  Of  course,  adjust- 
ments must  be  made  for  inventory  differences,  but  that 
is  readily  done  and  the  results  are  exceedingly  accurate. 
If  further  refinement  is  desired,  the  unit  cost  may  be 
developed  in  the  same  way  for  any  particular  item  or 
groups  of  items  composing  the  total  expenditures.  As  an 
instance,  assume  the  total  unit  cost  of  a  commodity  to  be 
$5.90  per  barrel.  This  cost  may  be  resolved  into  its 
various  elements,  as  raw  material,  labor,  or  power  per 
barrel,  and  all  this  may  be  done  readily  and  accurately 
without  intricate  costing  measures.  But  by  far  the 
greater  part  of  manufacture  requires  the  multiple  system 
and  the  development  of  that  system,  its  essential  methods, 
and  its  principles  with  examples  will  be  the  purpose  of 
this  volume. 

Methods  of  Costing  Collection.— After  this  considera- 
tion of  types  of  system  it  is  logical  to  discuss  the  methods 
of  accumulating  the  costs  against  the  product  and  which 
may  be  stated  as  the — 

Production,  or  job-order,   method,  and  the 
Operation,  or  process,  method. 

These  terms  are  almost  self-explanatory.  The  produc- 
tion-order method  means  the  charging  of  all  expenditures 
incurred  for  the  article  specified  in  the  order  to  that 
order.  The  operation,  or  process,  method  determines  the 
individual  costs  of  operations  or  processes  and  by  inte- 
gration of  the  various  processes  or  operations  to  a  total, 


MECHANISM  OF  COSTING  45 

ascertains  the  complete  cost.  Either  of  the  methods  of 
accumulation  (that  is,  by  production  or  by  process)  may 
be  used  with  either  tjipe  of  cost  system,  although  it  is 
probable  that  in  practice  the  process  system  Avould  be 
the  more  likely  selection  for  single  costs. 

The  multiple  cost  system  may  use  either  method  of  ac- 
cumulation. As  a  concrete  instance,  let  us  take  the  manu- 
facture of  tableware,  in  a  line  of  200  patterns,  ranging 
from  condiment  sets  to  chating  dishes  and  consisting  of 
from  five  to  15  pieces  assembled  together.  In  the  pro- 
duction-order method  all  parts  and  sub-  and  final  assem- 
blies would  be  made  on  a  factory  order  to  which  all  labor 
expenses  and  material  would  be  charged.  Chafing  Dish 
No.  505  might  cost  $7.59  on  one  series  of  production  orders 
and  then  $7.99  on  a  later  one.  By  the  operation  method 
each  individual  operation  would  have  been  costed  and  an 
average  taken  of  many  orders,  and  so  a  unit  operation 
cost  determined  that,  when  totalled  for  the  costs  of  all 
required  operations,  would  give,  with  the  material  and 
expense  added,  the  complete  cost.  This  example  repre- 
sents a  case  where  either  method  can  be  used  alternately, 
but  there  are  many  manufactures  in  which  it  is  imprac- 
ticable to  maintain  the  identity  of  an  order  through  the 
course  of  production  and  the  orders  are  massed  in  a 
stream  which  is  costed  by  the  operation  or  process,  by 
means  of  the  selection  of  arbitrarj^  units  ignoring  the 
boundaries  of  individual  orders. 

The  reason  for  the  process  method  has  been  well  put 
by  a  prominent  authority  in  the  terse  quotation,  ''many 
items  which  are  direct  in  relation  to  a  process  are  indirect 
in  relation  to  the  factory  order."  This  observation  con- 
tains the  very  pith  of  costing  principle,  namely,  to  attach 
to  the  product  its  portion  of  cost  as  near  to  the  point  of 
incidence  as  possible.    In  a  word,  the  selection  of  the  pro- 


46  ESSENTIALS  OF  INDUSTRIAL  COSTING 

duction-order,  or  process,  method  of  accumulation  is  to 
be  governed  solely  by  the  degree  of  adequacy  and  accu- 
racy with  which  the  proper  portion  of  cost  is  attached  to 
the  product. 

A  study  of  the  processes  of  a  particular  manufacture 
might  reveal  operations  most  of  which  could  be  success- 
fully costed  by  factory  order,  and  yet  there  would  be  one 
or  two  the  cost  of  which  could  only  be  accumulated  by  the 
process  method.  In  fact,  with,  accuracy  and  economy  as 
the  guiding  motive  of  all  costing  design  there  is  no  limit 
to  the  combinations  and  legitimate  compromises  which 
may  be  made  of  the  two  methods  within  the  same  manu- 
facture. But  whether  costing  depends  upon  the  factory 
order  or  the  process  it  presupposes  some  device  for  the 
measurement  of  production,  the  selection  of  a  definite 
unit  to  which  the  monetary  scale  of  dollars  and  cents  may 
be  applied. 

Relation  of  Planning  and  Costing.— It  so  happens  that 
a  directly  allied  function  of  manufacture  known  as 
"planning"  requires  a  similar  unitizing  of  production. 
Planning  is  a  device  for  executing  the  production  demand 
placed  upon  a  factory  with  the  best  possible  service  in 
delivery,  the  least  possible  occupation  of  capital  in  inven- 
tory, and  the  least  possible  equipment  in  activity.  Plan- 
ning operates  by  analysis  of  the  character  and  quantity 
of  the  demand,  and  the  capacity  of  the  equipment  and  the 
assignment  of  the  former  to  the  latter  with  the  point  of 
maximum  efficiency.  It  regulates  the  size  of  the  order 
and  its  precedence  through  the  factory,  and  it  selects  the 
machines  on  which  the  required  operations  are  to  be  done. 
Planning  requires  the  most  complete  physical  description 
of  the  product  with  itemized  lists  showing  every  opera- 
tion required,  the  machine  or  machine  groups  on  which 
each  operation  is  done,  and  the  department  in  which  each 


MECHANISM  OF  COSTING  47 

of  the  machines  or  machine  groups  are  located,  and  it  also 
estimates  the  rate  of  production  by  each  operation. 
Planning  further  requires  detailed  material  specifications 
showing  just  what  materials  and  the  quantities  thereof 
are  needed  for  the  product,  because  it  is  the  business  of 
planning,  among  other  things,  to  assure  the  material 
being  on  hand  ready  for  production  as  required. 

Planning,  therefore,  is  closely  correlated  with  costing, 
in  fact,  so  intimate  are  the  functions  that  no  one  could 
undertake  to  set  the  boundaries  between  them.  A  good 
cost  system  collects  data  and  arranges  factory  orders  in 
a  way  extremely  amenable  to  the  development  of  planning, 
while  planning  furnishes  a  groundwork  on  which  the  cost 
system  may  be  established  with  considerably  lessened 
difficulty  than  without  the  planning.  As  a  matter  of 
sound  modem  practice  the  two  functions  are  indispens- 
able, one  to  the  other,  and  their  combined  installation  en- 
hances the  value  of  each  and  lessens  the  cost  below  that 
of  their  separate  operation.  In  some  manufactures,  the 
work  ticket  sent  by  the  planning  department  is  issued  in 
duplicate  and  serves  as  a  time  card  for  the  cost  depart- 
ment, and  the  arrangement  of  orders  is  identical  with 
that  required  for  costing.  The  form  shown  in  Figures 
45  and  47  illustrates  such  a  ticket. 

The  planning  department  authorizes  all  plant  activity 
whether  in  the  way  of  maintenance  or  production.  It 
also  provides  for  production  reports  which  frequently 
contain  information  essential  for  costing.  In  fact,  the 
interests  of  the  two  departments  are  so  close  in  this  mat- 
ter of  production  reports  that  the  forms  may  be  designed 
to  combine  the  data  that  each  requires,  and  in  addition, 
the  data  which  may  be  necessary  only  for  one.  The  pro- 
duction reports  shown  in  Figures  31  and  30  illustrate 
typical  usage  in  this  matter.     Figure  31  is  a  carding 


48  ESSENTIALS  OF  INDUSTRIAL  COSTING 

report  which  not  only  indicates  the  output,  but  also 
reports  the  waste.  Figure  30  is  a  comparable  report  for 
a  foundry  and  shows  the  metal  used,  the  percentage  of 
good  castings,  the  unaccounted  for  losses,  etc.  This 
report  is  indispensable  to  costing  and  is  also  a  gauge 
of  producing  activity  for  the  planning  department. 

Basis  of  Modem  Accounting. — There  are  further  basic 
conditions  in  costing  to  be  considered,  which  are  matters 
of  such  common  practice  that  the  significance  of  their 
development  and  use  is  apt  to  be  overlooked,  yet  it  is  the 
author's  opinion  that  their  recognition  is  of  vital  im- 
portance and  their  discussion  necessary  for  a  complete 
treatment  of  the  subject  to  which  this  volume  is  devoted. 
This  refers  to  that  great  advance  in  accounting  which 
brought  it  from  the  rudiments  of  the  bookkeeping  of 
cash  movements  to  the  handling  of  extensive  transac- 
tions by  which  profits  might  be  represented  without  their 
being  apparent  in  cash.  This  development  has  been  ex- 
pressed excellently  by  Dr.  A.  M.  Sakolski  in  the  Yale 
Review  when  he  says : 

Modern  accounting,  especially  as  regards  the  determination  of 
net  profits,  rests  upon  the  principle  that  income  is  to  be  dis- 
tinguished from  receipts  and  expenses  from  disbursements. 
Prior  to  the  advent  of  the  corporate  form  of  business  organiza- 
tion bookkeeping  was  concerned  almost  exclusively  with  tracing 
out  the  movements  of  cash.  The  accounts  showed  the  amounts 
and  the  sources  of  cash  received  and  the  manner  in  which  it  was 
disbursed.  The  main  purpose  of  the  early  accounting  methods 
was  the  testing  of  the  honesty  of  the  employees  handling  cash. 
The  gauging  of  the  proprietor's  profits  as  the  result  of  individual 
transactions  was  of  secondary  importance.  In  modern  times  this 
condition  is  reversed.  Present  day  accounting  aims  to  exhibit  in 
correct  and  intelligible  form  the  net  gain  or  loss  of  business 
operations  independent  of  the  movements  of  cash  therein.  The 
tracing  of  the  actual  cash  receipts  and  the  actual  disbursements 
of  cash,  though  an  important  part  of  every  accounting  system, 
has  no  direct  relation  to  the  results  of  the  business  operations 
and  is  absolutely  no  gauge  of  the  net  losses  or  gains  incurred  in 


MECHANISM  OP  COSTING  49 

a  specific  period  of  time.    Profits  may  be  earned  though  not 
actually  realized  in  cash. 

Reserve  Accounts.— The  excerpt  states  this  phase  of 
modern  accounting  perfectly  and  the  point  it  makes  is  of 
even  greater  import  to  costing  than  to  corporate  account- 
ing, xter  se,  because,  in  the  process  of  constructing  current 
costs  and  accumulating  current  expenditures,  many  ex- 
penses are  set  up  which  may  not  become  actual  disburse- 
ments, but  once  in  the  year  or  once  in  several  years,  and 
may  even  continue  indefinitely  as  contingencies  or  re- 
serves. As  examples  of  such  items  may  be  mentioned 
property  taxes,  insurance  depreciation,  interest,  extraor- 
dinary replacements,  etc.  Property  taxes  are  generally 
paid  once  a  year,  yet  for  the  uses  of  costing  and  their 
proper  representation  therein,  the  anaount  of  taxes  has 
to  be  assumed,  the  monthly  quota  determined,  and  a 
credit  balance  established  by  journal  entry  monthly 
against  which  the  disbursement  when  made  is  charged. 
This  applies  similarly  to  fire  insurance,  liability  insur- 
ance, group  life  insurance,  special  insurance  such  as 
boiler  or  flywheel,  and  interest  and  depreciation.  In- 
deed, it  is  a  pity  that  there  is  no  agency  which  can  compel 
attention  to  an  expense  before  it  is  incurred  in  cash.  The 
negligent  attitude  of  many  manufacturers  to  the  impor- 
tant item  of  depreciation  may  be  traced  to  the  fact  that 
depreciation  is  a  contingency  which  they  refuse  to  recog- 
nize as  a  liability  until  the  cash  cost  of  machine  replace- 
ment or  actual  failure  bring  the  fact  forcibly  before  them. 

Reverting  to  the  principle  of  accounting  just  estab- 
lished and  its  peculiar  necessity  in  costs,  an  example  of 
extraordinary  replacements  is  of  importance.  Furnace 
linings  in  the  steel  and  glass  industries  are  big  expendi- 
tures  occurring  possibly  at  intervals   of  six  to  nine 


50  ESSENTIALS  OP  INDUSTRIAL  COSTING 

months  or  longer.  If  the  system  of  cost  accounting  is  not 
mere  approximation,  but  is  as  near  to  fact  as  can  be 
located,  such  expenditures  must  be  anticipated  by  the 
setting  up  of  specific  reserves  wnth  the  proper  propor- 
tions included,  in  the  monthly  expenses  and  therefrom  in 
the  calculation  of  costs. 

Controlling  Accounts.— Another  development  in  ac- 
counting which  is  employed  in  the  connection  of  costs 
with  the  general  books  and  the  preparation  of  current 
statements  of  operation  and  condition  is  the  Controlling 
account.  This  master  account  is  a  device  for  registering 
in  the  General  Ledger  a  multitude  of  transactions  w^ith  a 
few  summary  entries,  the  full  details  of  which  are  de- 
picted in  subsidiary  records.  The  Controlling  account, 
originally  developed  under  the  now  very  familiar  cap- 
tions, "Accounts  Receivable"  and  "Accounts  Payable," 
has  been  applied  in  cost  accounting  to  the  movements  of 
raw  material,  part  stock,  the  distribution  of  payroll,  the 
accumulation  and  apportionment  of  expense  and  the  ebb 
and  flow  of  the  work  in  process.  To  be  specific,  the  Raw 
Material  accounts  of  a  manufacture  might  be  brass,  cop- 
per or  wool  of  various  grades,  or  cotton.  All  receipts  of 
these  materials  would  be  charged  to  the  respective  ac- 
count from  the  Voucher  Register  (see  complete  details, 
Chapter  IV).  The  actual  withdrawals  during  the  month 
would  be  represented  by  one  total  of  possibly  daily  requi- 
sitions and  this  would  be  credited  to  the  account  by  jour- 
nal entry  and  charged  according  to  its  destination,  gene- 
rally to  "work  in  process."  The  balance  of  the  account 
would  represent  the  cost  value  of  the  material  on  hand. 
The  same  principle  applies  to  the  payroll  and  to  the  other 
accounts  mentioned,  full  detail  of  which  will  be  pre- 
sented in  later  chapters,  the  point  immediately  before  us 
being  the  application  and  necessity  of  controlling  ac- 


MECHANISM  OF  COSTING  51 

counts  to  complete  costing,  and  to  effect  the  connection  of 
costs  througli  the  general  books  with  current  statements 
of  operation  and  condition. 

Functional  Division  of  Expense.— The  elements  of  cost- 
ing and  cost  data  will  be  given  full  consideration  in  the 
succeeding  chapter,  but  in  connection  with  the  subject  of 
expense  it  is  thought  desirable  to  discuss  in  this  chapter 
certain  general  properties  which  belong  properly  to  the 
study  of  the  mechanism  of  costing,  the  topic  of  this  chap- 
ter. Manufacture  divides  into  two  general  functions,  as 
distinct  as  the  legislative,  judicial,  and  executive  depart- 
ments of  a  government,  and  they  are 

Distribution,  or  sales,  and 
Production,  or  manufacturing. 

Expense  follows  these  lines  of  division  and  it  is  the 
fundamental  tenet  of  modem  costing  that  they  be  kept 
distinct  and  separate  in  the  calculation  of  costs.  Ac- 
cordingly we  have 

Selling  expense,  and 
Manufacturing  expense. 

There  are  some  who  assert  that  there  is  a.  third  kind  of 
expense  which  they  term  ' '  administrative ' '  and  which  it  is 
of  equal  importance  to  segregate  and  to  apply  separately 
in  costs.  It  is,  however,  my  contention  that  administra- 
tive expense  is  not  a  distinct  entity  and  that  it  should  be 
apportioned  to  either  selling  or  manufacturing  expense, 
or  both,  and  in  this  treatise  administrative  expense  will  be 
handled  in  that  manner.  If  in  practice  it  happens  to  be 
the  desire  of  an  executive  to  isolate  administrative  ex- 
penses from  selling  and  manufacturing  expense  and 
apply  it  separately  in  costs,  it  can  be  done,  but  it  is  my 
opinion  that  it  is  not  necessary  and  that  it  does  not  add 
to  cost  accuracy  to  do  so,  and  that  this  expense  should  be 


52  ESSENTIALS  OF  INDUSTRIAL  COSTING 

spread  over  selling  and  manufacturing  expense  as  de- 
scribed. The  chief  point  that  it  is  desired  to  establish  is 
the  distinction  between  selling  and  a  manufacturing  ex- 
pense as  the  two  basic  components  of  operating  expense. 

DepartmentaJization  of  Expense. — The  next  essential 
concept  in  the  fundamentals  of  costing  is  that  of  the  de- 
partmental division  of  manufacturing  expense.  This  sim- 
ply is  a  mathematical  correspondence  with  that  division 
of  labor  which  has  been  designated  in  economics  as  the 
outstanding  feature  of  the  factory  system.  This  means 
specialization  instead  of  completion,  the  reduction  of  the 
processes  of  production  to  their  individual  parts,  and  the 
training  of  labor  to  parts  as  distinct  from  the  whole.  The 
division  of  labor,  together  with  the  development  of  even 
more  highly  specialized  machines,  resulted  in  a  central- 
ization of  effort  which  grouped  processes  and  in  which 
the  processes  were  sharply  differentiated  by  the  amount 
and  character  of  labor  as  well  as  the  extent  and  kind  of 
machinery  required  for  them. 

Despite  the  obvious  trend  to  arrange  processes  in  cen- 
ters and  despite  the  equally  obvious  differences  in  capital 
invested  in  equipment  and  attention  required  to  these  cen- 
ters, it  was  for  years  the  accounting  custom  to  lump  all 
manufacturing  expense  in  one  sum  and  levy  that  on  the 
productive  labor,  regardless  of  "the  character  of  the  de- 
partments in  which  the  labor  was  engaged. 

The  bed  rock  of  modem  cost  accounting  is  the  princi- 
ple of  the  departmentalization  of  the  plant,  and  by  that 
is  meant  the  accumulation  of  manufacturing  expenses  by 
departments  with  the  determination  of  a  separate  over- 
head rate  for  each  department.  It  requires  no  profound 
knowledge  of  accounting  to  realize  that  in  a  department 
with  extensive  bench  work  the  equipment  and  power 
charges  are  much  less  than  those  of  a  department  with 


MECHANISM  OF  COSTING  53 

costly  machinery  of  high  power  duty  with  severe  mainte- 
nance demands.  This  exaggerates  the  case  to  illustrate 
the  point  which  may  be  better  understood  by  the  state- 
ment that  in  a  plant  with  a  blanket  overhead  of  120  per 
cent  it  may  be  found  that  departmental  overheads  vary 
as  much  as  60  per  cent  to  500  per  cent.  Such  a  discrep- 
ancy directly  affects  costing  accuracy  and  in  some  cases, 
where  the  products  take  irregular  courses  with  different 
departmental  routing,  the  blanket  overhead  is  simply  mis- 
leading if  not  actually  destructive  to  accuracy. 

So  the  last  essential  in  the  mechanism  of  costing  is  the 
departmental  overhead.  This  itself  may  be  taken  in 
further  refinement  to  any  length  desired  or  practicable 
and  in  many  instances  the  machine  hour  or  the  process 
hour,  of  which  more  will  be  said  later,  have  been  used  to 
assure  the  accuracy  of  the  cost. 

The  mechanism  of  costing  has  one  controlling  principle 
to  which  all  others  are  auxiliary  and  that  is,  to  attach 
directly  to  the  product  every  element  of  cost  which  it  is 
commercially  feasible  to  do,  and  so  to  collate  and  apply 
the  remaining  factors  as  will  reduce  the  margin  of  error 
to  a  minimum.  It  is  a  principle  as  simple  as  that  of  mili- 
tary strategy  which  calls  for  ''getting  there  first  with 
the  most,"  but  its  execution,  like  war  or  battle,  is,  in  the 
specific  problem,  a  matter  of  the  inventive  ability  of  the 
one  in  charge  and  then  of  the  personnel  and  organization 
back  of  the  plan,  the  expense  of  which,  in  the  last  analysis, 
only  is  limited  by  commercial  expediency. 


CHAPTER  IV 

ELEMENTS  OF  COSTING  AND  SOURCES   OF   COSTING   DATA 

For  he  who  grrasps  the  problem  as  a  whole 

Has  calmed  the  storm  that  rages  in  his  soul. — Goethe. 

The  Elements  of  a  CJost.— In  the  preceding  chapter  the 
various  types  of  cost  systems  and  the  influence  of  the 
physical  processes  on  these  types  were  discussed,  and 
now  a  further  analysis  of  the  structural  elements,  or 
anatomy,  of  costs  is  in  order.  A  cost  is  composed  of  three 
essential  elements,  factors,  or  constituents,  namely : 

Material 

Labor 
Expense 

Material  is  the  substance  of  manufacture — it  is  the 
medium  on  which  the  productive  processes  are  exerted  in 
order  to  increase  its  utility.  To  account  for  the  use  of 
material  and  to  determine  its  proportion  in  costs  is 
usually  not  troublesome,  but  there  are  conditions  where 
it  is  a  problem  of  exacting  difficulty  and  where  proper  so- 
lution is  a  predominant  factor  in  costing  accuracy.  It 
might  also  be  added  that  there  are  certain  conditions  in 
waste  and  scrap  where  by-products  of  gi'eater  or  less 
value  are  developed,  which  present  almost  profound  com- 
plexity in  costing. 

Material,  for  convenience,  is  divided  into  two  kinds, 

direct  and  indirect,  otherwise  known  as  productive  and 

nonproductive.     Direct,  or  productive,  material  is  that 

which  is  an  integral  or  actual  part  of  the  product  when 

finished,  or  in  any  stage  of  the  processes  incident  to 

5i 


ELEMENTS  OF  COSTING  55 

finishing  and  which  may  be  charged  as  such.  Indirect  or 
nonproductive,  material,  sometimes  termed  supplies,  is 
that  which  is  required  in  the  operating  processes,  but 
which  is  not  at  any  time  a  part  or  physical  feature  of  the 
product,  nor  is  it  measurable  for  direct  charge  to  the 
product.  Direct  material  might  be  illustrated  by  blade 
steel  in  cutlery,  yarn  in  cloth,  pig  iron  in  a  foundry,  sand 
in  glass  manufacture,  whereas  indirect  material  might  be 
represented  by  crocus  for  blade  polishing,  belts  for  looms, 
moulding  sand  in  a  foundry,  and  refractory  lining  bricks 
for  a  glass  melting  furnace  in  the  same  respective 
manufactures. 

Labor  is  similarly  divided  into  direct  and  indirect,  or 
productive  and  nonproductive,  and  here  again  the  dis- 
tinction is  determined  simply  by  the  possibility  or  not  of 
assigning  it  directly  to  the  cost  of  the  product.  If  the 
labor  cannot  be  attached  directly  to  the  product  in  the 
cost,  it  automatically  becomes  indirect,  or  nonproductive, 
and  must  be  applied  otherwise. 

These  items  of  indirect  material  and  labor,  with  certain 
other  expenditures,  are  collected  in  an  accounting  plexus 
known  as  expense,  either  manufacturing  or  selling.  By 
expense,  in  modem  costing,  is  implied  a  departmental 
subdivision  of  the  total  and  in  the  listing  of  such  expense 
departments  there  are  two  classes  analogous  to  the  direct 
or  indirect  distinctions  in  labor  and  material,  known  as 
contributing  and  productive.  The  contributing  depart- 
ments are  those  which,  by  nature,  supply  service  to  vari- 
ous productive  departments,  and  while  accumulated  sep- 
arately they  ultimately  are  merged  with  the  productive 
departments  on  some  basis  of  prorating,  selected  to  se- 
cure the  greatest  accuracy. 

Stages  of  Costing.— The  elements  of  cost,  namely,  mate- 
rial, labor,  and  expense,  compose  the  various  stages  of 


56  ESSENTIALS  OP  INDUSTRIAL  COSTING 

total  cost  which  in  practice  are  termed  as  shown  in  the 
following  illustration : 

•    Direct  material   $50.00 

Direct  labor 50.00 

Prime  cost   $100.00 

Manufacturing  expense  50.00 

Manufacturing  cost   $150.00 

Selling  expense   15.00 

Selling  cost   $165.00 

Prime  cost  is  thus  seen  to  be  the  total  of  direct  mate- 
rial and  labor,  manufacturing  cost  the  total  of  prime  cost 
and  manufacturing  expense,  and  selling  cost  the  total  of 
manufacturing  cost  and  selling  expense.  In  this  con- 
nection it  might  be  well  to  state  that  administrative  ex- 
pense is  apportioned  to  and  included  in  manufacturing 
and  selling  expense.  Of  course,  these  are  expressions  for 
summary  figures  only,  for  in  practice  the  direct  labor 
would  be  itemized  by  departments  and  the  overhead  ap- 
plied on  the  labor  by  means  of  departmental  rates. 

Variations  in  Proportions  of  Costing  Elements.— The 
provision  for  the  collection  and  distribution  of  expense 
ordinarily  constitutes  the  chief  technical  province  of 
costing,  for  it  is  generally  this  element  or  factor  in  costs 
on  which  attention  must  be  concentrated  if  success  is  to 
be  attained.  By  deduction,  therefore,  it  follows  that  the 
objective  of  costing  design  is  to  eliminate  every  possible 
item  from  expense  consistent  with  clerical  economy  and 
to  allocate  as  much  of  the  cost  as  can  be  done  directly  to 
the  product,  as  labor  or  raw  material.  Only  an  irreduci- 
ble minimum  should  be  left  to  compose  expense.  Success 
in  this  effort  is  largely  a  function  of  the  kind  of  manufac- 
ture to  be  costed.     Some  products  involve  a  low  labor 


ELEMENTS  OF  COSTING  57 

ratio  with  high,  expense,  others  are  high  in  labor  and  low 
in  material  and  expense,  while  in  others  material  is  the 
major  factor  with  labor  and  expense  of  relative  insignifi- 
cance, and  frequently  intermingled  or  merged  as  befitting 
minor  portions  in  total  expenditures.  Paper  manufac- 
ture is  a  case  of  high  expense  with  low  labor,  cutlery  one 
of  high  labor  and  low  expense,  whereas  cordage  is  a  con- 
version industry  where  the  raw  fiber  constitutes  as  much 
as  80  to  90  per  cent  of  the  cost. 

A  summary  description  of  manufacture  such  as  this 
may  indicate  the  wide  variety  which  may  be  encountered 
in  the  relative  composition  and  proportions  of  the  ele- 
ments of  costs  in  different  industries  and  possibly  induce 
recognition  of  the  unquestioned  fact  that  success  in  cost- 
ing design  demands  perspective,  for  it  most  surely  re- 
quires a  comprehensive  grasp  of  the  peculiar  character- 
istics and  contrasting  elements  of  various  manufactures 
and  a  sense  of  the  fitness  of  facts,  for  it  may  truly  be  said 
of  costing  that  'Svhat  is  meat  for  one  would  be  poison  for 
another."  No  matter  how  great  the  divergence  in  the 
elements  of  costs  in  one  manufacture  from  another,  the 
principle  of  charging  every  possible  dollar  of  expenditure 
directly  to  the  product  is  the  first  necessity  and  the  cardi- 
nal rule.  The  variations  in  proportion  of  these  elements 
in  cost  has  been  mentioned  only  to  show  that  the  factors  in 
the  problem  are  anything  but  constant  and  that  the  de- 
gree of  success  in  charging  expenditures  directly  to  costs 
in  one  manufacture  may  be  easily  surpassed  or  utterly 
unapproached  in  another  with  the  same  technical  skill 
applied. 

The  average  manufacturing  overhead  or  expense  rate 
ranges  from  100  to  150  per  cent  on  productive,  or  direct, 
labor,  which  shows  that  with  best  efforts  to  allocate  as 
much  as  possible  directly  to  labor,  the  proportion  is  no 


58  ESSENTIALS  OF  INDUSTRIAL  COSTING 

better  than  one  to  one  dollar  and  a  half  of  expense  to 
every  dollar  of  productive  labor.  It  is  rare  that  an  over- 
head rate  runs  lower  than  50  per  cent  and  sometimes  the 
rate  amounts  to  300  or  500  per  cent  or  higher. 

As  indicative  of  the  problem  which  is  presented  in  the 
varying  proportions  of  the  elements  of  costs  in  different 
industries,  the  following  approximations  are  given,  show- 
ing the  ranges  which  maj^  exist  and  which  in  individual 
cases  may  even  be  exceeded. 

Productive  labor  may  range  from  25  to  75  per  cent  of 
total  manufacturing  cost. 

Productive  material  may  range  from  15  to  90  per  cent 
of  total  manufacturing  cost. 

Manufacturing  expense  may  range  from  25  to  65  per 
cent  of  total  manufacturing  cost. 

It  is  the  obvious  principle  of  costing,  as  well  as  the 
common  sense  procedure  in  the  specific  industry,  to  ascer- 
tain the  proportions  of  the  elements  of  cost  so  that  effort 
may  be  directed  to  best  effect  by  concentration  on  the  es- 
sential items.  For  it  will  be  easily  evident  that  refine- 
ment in  costing  the  larger  elements  will  result  in  greater 
aggregate  accuracy  than  equally  detailed  measures  for 
accounting  lesser  elements  in  costs.  This  is  likewise 
true  of  the  constituents  of  an  element.  For  an  example, 
even  if  labor  might  be  the  comparatively  high  item  of  the 
three,  the  endeavor  to  account  for  the  expenditure  repre- 
sented by  the  payroll  must  be  controlled  by  practical  con- 
sideration in  the  matter  of  time  collection,  the  important 
and  large  amounts  being  carefully  recorded  and  the 
lesser  in  amount  and  character  not  too  exhaustively  an- 
alyzed. 

Perspective  in  Costing.— Much  of  the  distrust  of  cost- 
ing which  fills  the  popular  mind  and  is  the  frequent  obses- 
sion of  executives  has  been  bred  from  disregard  of  this 


ELEMENTS  OF  COSTING  59 

common  sense  policy.  This  has  been  occasioned  often 
by  narrow  zealots  of  costing  technicalities  who  applied 
the  same  exacting  procedure  to  all  items  regardless  of  im- 
portance and  who,  while  correct  in  the  strict  science  of 
the  work,  lacked  judgment  and  balance  in  its  applica- 
tion. As  example  of  this  weakness  I  have  seen  cases 
where  the  detailed  cost  of  a  product  had  been  carried 
to  four  and  even  five  decimal  places,  when  this  silly 
practice  ignored  the  obvious  fact  that  the  margin  of 
error  in  the  whole  costing  machine  could  hardly  justify 
extension  beyond  three  decimal  places.  This  example  is 
simply  clerical  waste  and  while  typical  is  not  as  serious 
as  the  tendency  often  shown  to  cost  items  to  such  fine 
limits  that  the  expense  of  calculation  approaches  that  of 
the  item  itself.  It  must  be  remembered  always  that  as 
long  as  costing  is  a  device  for  commercial  service,  it 
must  be  designed  to  carry  its  own  weight  at  all  times  and 
under  all  circumstances.  I  know  of  no  apter  commen- 
tary on  this  weakness  against  which  constant  gTiard  and 
scrutiny  must  be  held  than  that  contained  in  a  letter 
written  by  Lord  Chesterfield  to  his  son  on  the  matter  of 
personal  accounts,  and  which,  because  of  its  essential 
truth  as  much  now  as  in  1749  is  quoted  herewith : 

But  remember,  in  accounting,  as  well  as  every  other  part  of 
life,  have  the  proper  attention  to  proper  objects  and  the  proper 
contempt  for  little  ones.  A  strong  mind  sees  them  in  their  true 
proportion,  a  weak  one  views  them  through  a  magnifying  me- 
dium, which,  like  the  microscope,  makes  an  elephant  of  a  flea  and 
magnifies  all  little  objects  but  cannot  conceive  great  ones. 

Operating  Ratio.— We  have  spoken  of  the  variations 
one  to  the  other  in  the  ratios  of  labor,  material,  and  ex- 
pense, and  it  may  be  of  interest  to  mention  that  these  ele- 
ments of  cost  are  frequently  employed  by  statisticians  in 
determining  what  is  known  as  the  "operating  ratio." 
This  ratio,  possibly  more  familiar  in  connection  with  rail- 


60  ESSENTIALS  OF  INDUSTRIAL  COSTING 

roads,  signifies  the  percentage  relation  of  cost  of  pro- 
duction to  income.  The  trend  of  this  operating  ratio 
through  the  years  gives  a  general  guiding  index  of  manu- 
facturing efificiency  and  when  analyzed  further  into  its 
elements  of  material,  labor,  and  expense,  is  an  exceedingly 
helpful  measure  of  operating  efficiency.  This  operating 
ratio,  of  course,  varies  so  greatly  that  it  has  no  compara- 
tive value  in  different  industries,  but  limited  to  one  cor- 
poration it  is  informing  and  as  has  been  stated,  is  fre- 
quently employed  by  statisticians  to  ascertain  and  to  an- 
ticipate the  connection  of  financial  worth  with  operating 
conditions  and  tendencies. 

Returning  to  the  essential  matter  of  the  elements  of 
cost  it  has  been  seen  that  they  consist  of 

Direct  material 
Direct  labor 
Manufacturing  expense 
Selling  expense. 

In  the  previous  chapter  the  mechanism  for  costing  these 
elements  has  been  discussed,  the  treatment  in  the  two 
chapters  being  introductory  and  preparatory  to  the  study 
of  working  details  which  is  to  occupy  the  remainder  of 
this  volume.  The  principles  have  been  enumerated ;  their 
execution  in  practice,  the  data  which  actuate  them,  and 
the  derivation  of  these  data  will  now  receive  attention. 

Sources  of  Costing  Data.— The  essential  records  to 
which  all  accumulated  information  is  subsequently  con- 
densed or  from  which  it  is  abstracted  are  as  follows : 

Material  Requisition  Distribution 
Supply  Requisition  Distribution 
Payroll  Distribution 
Voucher  Register 
Journal 

The  collection  of  all  data  required  for  these  records 
will  be  explained  in  the  following  chapters,  but  it  has 


ELEMENTS  OF  COSTING 


61 


been  deemed  wise  to  consider  these  records  as  focal 
points  before  entering  the  maze  of  details  of  which  they 
are  the  convergence.  These  records  and  data  are  com- 
piled at  regular  intervals  and  the  almost  universal  cus- 
tom is  to  consider  the  month  as  the  costing  period.  The 
calendar  month  is  used  whenever  the  payroll  ends  with 
the  month.  Many  companies  pay  twice  a  month,  on  the 
first  and  fifteenth,  but  the  prevailing  majority  pay  each 
week  with  a  certain  number  of  days  reserved  as  a  work- 
ing allowance  for  the  clerical  routine  of  computing  the 
payroll.  With  this  arrangement  the  calendar  month 
would  usually  end  before  the  payroll  week  and  this  in- 
volves excessive  labor  in  splitting  the  payroll  for  proof 
of  its  total  against  the  detailed  distribution.  Because  of 
this  difficulty  it  is  the  frequent  practice,  and  may  be  un- 
hesitatingly recommended,  to  establish  arbitrary  costing 
months  consisting  of  four-  and  five-week  periods.  By 
this  device  one  five-week  period  succeeds  two  four-week 
periods  until  the  end  of  the  year.  In  detail  this  would 
work  out  as  follows : 


First 
Quarter 

Second 
Quarter 

Third 
Quarter 

Fourth 
Quarter 

Total 

4  weeks 

4  " 

5  " 

4  weeks 

4  " 

5  " 

4  weeks 

4  " 

5  " 

4  weeks 

4  " 

5  " 

13  weeks 

13  weeks 

13  weeks 

13  weeks 

52  weeks 

It  will  be  found  in  applying  this  to  the  year  that  the 
arbitrary  costing  periods  closely  approximate  the  calen- 
dar month  and  coincide  within  a  maximum  difference  of 
five  days  and  usually  two  or  three. 

Material  Requisition  Distribution.  —  The  material 
requisition  distribution  is  illustrated  in  Figure  5.     It 


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ELEMENTS  OF  COSTING  63 

shows  the  cost  value  of  the  different  kinds  of  material 
consumed  in  the  month  and  besides  this  gives  the  full  de- 
tail of  the  charges  to  factory  order  number,  process  or 
classification  on  which  the  material  was  used.  Material 
is  the  common  term  for  direct  material  and  supplies  or 
stores  for  indirect  material.  Occasionally  direct  material 
is  used  as  supply  or  expense  and  the  amount  of  this  dis- 
bursement is  indicated  on  the  material  requisition  distri- 
bution. Similarly  a  supply  or  indirect  material  might  be 
requisitioned  as  direct  material  and  such  a  transfer 
would  be  represented  on  the  Supply  Requisition  Distri- 
bution. 

Material  used  as  supplies  and  supplies  as  materials  are 
frequent  occurrences  in  manufacture.  For  instance,  the 
sheet  iron  used  in  knife  handles  might  be  desired  for  a 
machine  repair  and  a  bolt  ordinarily  stored  for  repairs 
might  be  requisitioned  for  the  assembly  of  a  special 
machine  in  regular  production.  These  items  are  cited  not 
because  important  in  amount,  but  to  illustrate  the  detail 
which  a  material  distribution  record  furnishes.  The  ma- 
terial requisition  distribution  is  the  source  of  the  journal 
entry  made  monthly,  whereby  the  various  raw  material 
accounts  are  credited  with  the  totals  shown  on  it  and 
corresponding  charges  made  to  the  Finished  Part  Stock 
account,  the  Work  in  Process  account  or,  in  the  case  of 
a  material  used  as  a  supply,  the  Manufacturing  Expense 
account. 

Supply  Requisition  Distribution.— The  Supply  Requisi- 
tion Distribution,  like  the  Material  Requisition  Distribu- 
tion just  discussed,  shows  the  cost  value  of  the  supplies 
issued  for  the  month  and  is  illustrated  in  Figure  6.  The 
credit  in  this  case  is  generally  made  to  but  one  account, 
Stores,  and  the  charge  in  bulk  in  proper  proportions  to 
the  Controlling  account  under  the  caption  Manufacturing 


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ELEMENTS  OF  COSTING  65 

Expense  and  Selling  Expense.  The  Supply  Requisition, 
however,  also  furnishes  the  detail  of  the  departmental 
charges  of  the  supplies  used  and  any  refinement  or 
analysis  of  these  charges  which  may  be  considered  of 
sufficient  moment  to  record.  For  instance,  in  a  plant  of 
20  departments  the  bulk  charge  for  supplies  used  may  be 
an  appreciable  proportion  of  the  total  expense  of  those 
departments,  and  in  such  a  case  the  charges  may  be  re- 
solved into  their  parts.  For  example,  in  a  department 
using  files,  small  twist  drills,  or  in  another  department 
using  various  kinds  of  expensive  abrasive  wheels  or 
grains,  it  may  be  desired  to  know  the  amount  of  each  and 
this  information  may  be  compiled  on  this  Supply  Requisi- 
tion Distribution.  Information  of  this  character  is  not 
needed  in  such  detail  to  compile  operating  overheads,  but 
it  does  tabulate  data  which  are  of  inestimable  benefit  to 
the  management.  An  executive  should  trace  all  expenses 
to  their  lair  and  by  constant  vigilance  and  statistical  study 
keep  himself  apprised  of  the  various  items  which  com- 
pose current  expense.  A  record  of  this  kind  will  supply 
the  means  and  also  may  be  extended  at  will. 

Pa3rrolI  Distribution.— The  Payroll  Distribution  in 
most  industries  is  the  most  expensive  feature  of  the  cost 
system  and  it  is  generally  also  the  most  difficult  to 
secure  with  accuracy.  It  is  dependent  upon  time  reports 
which  in  a  later  chapter  will  be  seen  to  contain  great 
possibilities  for  error  and  incorrect  charges.  It  is  fre- 
quently a  work  of  such  detail  that  its  enormity  detera 
steps  for  its  proper  execution,  and  even  with  adequate 
provision  for  its  compilation,  correctness  in  its  details  de- 
mands constant  and  closest  supervision.  The  Payroll 
Distribution  accounts  for  the  disposition  of  the  money  ex- 
pended for  labor,  whether  it  be  shop  wages  or  office  or 
administrative   salaries.     The   latter   are   readily  dis- 


66 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


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FiGUEE  7. — PAYROLL  DISTBIBUTION 


tributed  and  almost  invariably  are  fixed  in  proportion 
and,  therefore,  rarely  require  detailed  time  reports,  so 
that  the  distribution  of  shop  wages  constitutes  the  chief 
work  of  the  payroll  department.  The  Distribution  must 
prove  with  the  total  payroll  and  its  detail  is  determined 
by  the  specific  requirements  of  the  particular  manufac- 
ture. 

The  primary  division  is  between  direct  and  indirect 
labor,  or  productive  and  nonproductive.  The  productive 
labor  shows  the  charges  against  factory  order  or  process 
and  thus  in  whatever  subdi\'ision  is  required,  the  nonpro- 
ductive covers  the  big  field  of  all  labor  not  engaged  on 
actual  production.  It  may  include  repair  and  main- 
tenance labor,  supervision,  inspection,  power,  heat  and 
light  labor,  yard  labor,  roustabout,  stores  department,  re- 


ELEMENTS  OF  COSTING 


67 


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ceiving  department,  shipping  department  labor,  etc.  All 
of  this  is  analyzed  as  required  for  departmental  expense 
collection.  An  example  of  such  a  distribution  is  shown  in 
Figure  7.  This  sheet,  showing  the  information  required 
for  a  certain  installation,  gives  no  hint  of  the  great  mass 
of  detail  of  which  it  is  the  resultant. 

Voucher  Register.— The  Voucher  Register  furnishes 
the  modern  method  of  recording  accounts  payable  and, 
by  adaption,  is  one  of  the  chief  structural  members  in 
costing,  and  the  connection  of  costing  to  the  general  led- 
ger. The  development  of  the  Voucher  Register  and  the 
controlling  accounts  payable  is  now  of  some  years '  stand- 
ing. Formerly,  individual  accounts  were  maintained  in 
the  Ledger  for  each  creditor,  which  entailed  a  burden  of 
clerical  labor  almost  impossible  to  realize.     "With  the 


68 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


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Voucher  Register  all  individual  accounts  are  abandoned 
and  just  the  one  "accounts  payable"  is  maintained. 

At  the  present  juncture  our  immediate  interest  is  in  the 
manner  in  which  the  Voucher  Eegister  depicts  the 
charges  represented  by  the  invoices  entered  in  it  and 
particularly  how  these  charges  are  recorded  so  as  to  con- 
tribute the  data  required  for  costing  and  the  general 
ledger  control  of  costing.  As  has  been  seen  in  preceding 
chapters,  costing  and  monthly  statements  based  thereon 
operate  by  recording  directly  current  manufacturing  ac- 
tivity as  distinguished  from  the  belated  and  inverted 
method  of  determining  the  cost  of  the  activity  by  deduc- 


ELEMENTS  OF  COSTING 


69 


VOUCHER  REGISTER 

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tion  after  taking  a  physical  inventory.  In  order  to  local- 
ize possible  errors,  raw  material  is  divided  into  its  sev- 
eral leading  kinds,  supplies  are  carried  in  a  stores  ac- 
count, the  details  of  departmental  expense  are  controlled 
by  one  clearing  account,  generally  termed  ''manufac- 
turing expense.'^  These  measures  describe  in  brief  the 
use  of  the  Voucher  Eegister  for  costing  and  are  illus- 
trated in  a  typical  Voucher  Register  in  Figure  8. 

As  will  be  observed,  this  form  provides  space  for  the 
voucher  number  or  index  by  folio  and  line,  the  name  of 
the  dealer  or  creditor,  the  date  of  payment  and  then  a 
series  of  captions  covering  the  charge  distribution.  First, 


70  ESSENTIALS  OF  INDUSTRIAL  COSTING 

tliere  are  the  fixed  asset  accounts  and  here  are  listed  only 
the  ones  which  are  presumably  active  in  the  way  of  addi- 
tions, or  a  blank  column  for  the  other  asset  accounts 
entered,  with  designation  by  account.  Then  the  list  of 
raw  material  accounts,  then  supplies,  then  payroll,  in 
which  the  weekly  payrolls  are  entered,  and  then  manu- 
facturing expense.  The  totals  of  each  of  the  columns 
under  these  captions  are  transferred  monthly  as  charges 
to  the  accounts  by  which  they  are  entered,  the  entire  total 
being  a  credit  to  accounts  payable. 

In  connection  mth  the  Voucher  Register  the  manufac- 
turing expense  account  column  is  particularly  note- 
worthy, for  this  supplies  the  detailed  charges  to  depart- 
ments of  all  items  which  cannot  be  charged  through  pay- 
roll or  on  requisition.  Each  of  these  charges  is  entered 
from  invoices  bearing  the  charge  key  or  code  number,  in- 
dicating either  the  subsidiary  account  number,  or,  as  in 
the  illustration,  the  line  in  the  Expense  Analysis  which, 
as  will  be  described  later  in  the  volume,  is  a  device  for 
handling  subsidiary  expense  accounts  more  readily  and 
practicably  in  greater  detail  than  the  conventional  sub- 
sidiary Expense  Ledger. 

Petty  Cash  Expenditures.— It  might  be  of  value  to  add 
that  petty  cash  expenditures  are  handled  through  the 
Voucher  Register.  A  fixed  fund  is  impressed  for  facili- 
tating small  cash  payments  and  a  voucher  drawn  at  the 
end  of  the  month  for  the  amount  expended.  This  voucher 
is  entered  in  the  Register  with  such  distribution  of 
charges  as  its  own  record  indicates  and  the  fund  thus  re- 
plenished. This  method  avoids  the  necessity  of  consider- 
ing petty  cash  as  a  separate  source  of  costing  data  and 
thereby  assists  the  routine  considerably. 

Entrance  of  Costing  Data  through  Journal. — Up  to  this 
point  there  has  been  described  the  Material  and  Supply 


ELEMENTS  OF  COSTING  71 

Requisitions  Distribution  and  the  Voucher  Register  as 
sources  of  cost  data,  and  in  conclusion  it  is  necessary 
to  explain  further  items  which  are  derived  from  monthly 
journal  entries.  These  items  have  been  mentioned  in  the 
chapter  on  The  Mechanism  of  Costing,  but  for  comple- 
tion and  by  way  of  brief  repetition,  they  are  presented 
herewith.  Certain  expenditures  are  made  infrequently, 
possibly  only  once  a  year  or  even  once  in  three  years. 
Among  these  are  depreciation,  taxes,  insurance  of  all 
kinds,  items  of  extended  duration  in  use  but  consumable 
and  carried  in  suspense  accounts,  etc.  In  order  to  main- 
tain current  records  of  comparative  value  it  is  necessary 
to  reduce  such  items  to  an  equivalent  monthly  amount 
arbitrarily  put  into  costs  by  process  of  journal  entries. 
These  items  are  charges  to  manufacturing  or  selling  ex- 
pense and  credits  to  the  various  accounts  to  which  they 
are  assigned,  as  depreciation,  taxes,  fire  insurance,  group 
life  insurance,  liability  insurance,  and  such  extraordinary 
replacement  accounts  as  may  be  required.  Credit  bal- 
ances to  these  accounts  are  thus  constructed  to  which  the 
expenditures  when  made  are  charged  through  the 
Voucher  Register  or  other  costing  channels. 

This  chapter  has  presented  the  elements  of  costing  and 
essential  sources  of  costing  data.  The  succeeding  chap- 
ters will  present  explicitly  the  specific  methods  of  ac- 
cumulating the  information  from  which  costs  are  derived, 
and  it  will  follow  the  plan  as  developed  in  treating  first 
of  material,  then  labor,  and  then  expense. 


CHAPTER  V 

THE   COSTING   OF    MATERIAL 

All  product  of  factories  consists  of  combinations  of  materials  and 
the  time  of  the  necessary  fonnative  processes. — Dexham, 

Often  the  waste  products  of  an  industry  prove  to  be  as  valuble  as 
the  product  itself. — The  Wall  Street  Journal. 

Material  Accounting.— Material  is  money  and  the  ac- 
counting of  its  movements  is  of  importance  equal  to  the 
control  and  checking  of  cash.  Currency,  prohably  be- 
cause it  is  the  readier  medium  of  exchange,  instinctively 
receives  scrupulous  watchfulness,  but  the  fact  that  mate- 
rial may  possess  equivalent  or  even  greater  value  is  often 
a  difficult  working  concept  to  instill  into  the  minds  of 
those  responsible  for  its  care.  Yet  absolutely  correct 
accounting  of  every  dollar  expended  for  material  is  not 
only  a  prerequisite  of  costing,  but  a  preliminary  to 
economy,  and  by  accounting  is  implied  something  beyond 
purchase  and  the  registry  and  proper  payment  of  bills 
therefor.  For  ac<?ounting  also  consists  of  accurate 
records  of  the  disposition  of  material,  its  charge  to  prod- 
uct or  expense,  its  ultimate  destiny  in  finished  article 
or  its  diversion  as  scrap,  waste,  or  by-product.  Records 
showing  the  course  of  material  consumption  with  its  es- 
sential events  outlined  are  indispensable  to  fullest  effi- 
ciency, as  well  as  to  costing  accuracy.  In  fact,  in  some 
businesses  material  is  of  transcendant  importance,  as  in 
cases  where  the  composition  or  mix,  the  waste,  the  loss 
or  gain  in  weight  from  the  manufacturing  processes  are 
direct  determinants  of  profit  or  loss  with  an  extremely 

close  margin  in  these  factors  between  them. 

72 


COSTING  OF  MATERIAL 


73 


Specification 

Sheet 

riATc-  nonru 
P^TTF""  wn                                           QUANTITY                                           Date  Wanted 

BLADE  FJNISM 
TANG  FINISH 
SWEDGC 
NAIL  MARK 
SPRING  FINISH 
IPRINO   HOLC 

SKETCH    OF    KNIFE 

FAKT  HO. 

F..„H«. 

StOCN 

Figure  9. — specification  sheet 


Pacts  Regarding  Material.— The  essential  facts  with 
regard  to  material  that  are  required  for  costs  vary  with 
the  industry,  but  as  a  general  rule  they  are  as  follows : 

Quantity 

Kind 

Size 

Purchase  cost 

Purpose  or  charge 

Elements  of  waste  or  scrap 

Spoilage 

Seconds 

Material  Specifications. — The  manner  in  which  this  in- 
formation is  supplied  will  now  be  described.    The  quan- 


74  ESSENTIALS  OF  INDUSTRIAL  COSTING 

tity,  kind,  and  size  of  material  required  for  a  given  prod- 
uct may  be  ascertained  generally  without  difficulty.  In 
certain  assembly  industries  this  information  is  compiled 
in  the  form  of  a  Specification  Sheet  or  Bill  of  Material. 
These  records,  illustrated  in  Figures  9  and  10,  show  the 
parts  or  sub-assemblies  which  compose  the  finished  prod- 
uct. 

They  also  show  the  parts  which  contribute  to  the  sub- 
assemblies and  for  these  parts  indicate  the  kind  and  size 
of  raw  material  from  which  the  parts  are  made. 

Specification  Sheets  or  Bills  of  Material  of  this  kind 
may  often  be  made  complete,  but  in  some  cases  the  detail 
is  too  great  to  be  considered  in  one  sheet  and  is,  there- 
fore, compiled  on  subsidiary  records.  For  instance,  man- 
ufacture to-day  is  conducted  increasingly  on  a  basis  of 
physical  specification.  Indeed,  the  processes  of  modern 
heat  treatment  of  alloy  steel  depend  for  their  success 
upon  a  definite  chemical  composition  which  must  be  con- 
sidered in  purchase  and  use.  In  such  cases  a  code  letter 
or  sjTiibol  suffices  to  define  on  the  Bill  of  Material  what 
material  is  required  for  a  given  part,  and  other  records 
are  kept  showing  the  technical  detail  or  purchase  speci- 
fications of  the  material  itself.  This  is  also  true  of  mate- 
rial which  comes  in  various  patterns  or  colors,  such  as 
celluloid  in  the  manufacture  of  pocket  knives.  Here, 
in  the  case  of  a  knife  using  a  celluloid  cover  of  a  certain 
kind,  the  code  number  would  be  used,  as  "No.  646  cellu- 
loid," instead  of  the  full  description  of  the  particular 
celluloid  thus  intended. 

Quantity  of  Material.— Generally  the  material  required 
for  a  product  is  readily  determinable  though  often  a  work 
of  extensive  detail,  but  there  are  manufactures  where  this 
information  is  exceedingly  difficult  to  establish,  and  as 
example  of  such  there  might  be  cited  the  manufacture  of 


SPECIFICATION  SHEET 

STYLE 
DESCRIPTION                                                           SIZE 

PART  NO. 

PART  NAME 

MATERIAL 

QUAN. 
PER  DOZ. 

Body 

Sleeves 

1  Gusset 

2 

3 

4 

Shirt  Cuffs 

Dr.  Cuffs 

Collarette 

Shoulder  Straps 

Facing 

Stay 

Buttons 

Braid 

Lace 

Ribbon 

Figure  10. — specification  sheet 


75 


~ 

3 

— 1 

• 
3 

d 

z 

> 
D< 

(to 
oo 

1     I 

1 

OS 

m       1 

O 

3 

Z 
2 

CD 

1-H 

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0        > 
O 

M 

u 

N 

I 

o 

hi 

1- 
Z 
D 

Si 

1-H 

L 

s    >• 
>    t 

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"a 

■ 

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1-H 

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0        ] 

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4 

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H 
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Z 
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^   ,. 

Ph 


76 


COSTING  OF  MATERIAL  77 

woolen  cloth.  Cloth  is  a  product  composed  of  yarns  of 
various  sizes,  mixtures  and  proportions.  The  problem 
of  ascertaining  how  much  of  each  yarn  is  required  for  a 
yard  of  cloth  is  not  as  easy  of  solution  as  the  compilation 
of  the  bill  of  material  of  the  parts  of  a  dump  wagon. 
Sometimes  it  will  be  found  that  manufacturers  have 
maintained  records  showing  how  much  of  each  of  the 
different  yarns  are  used  in  a  certain  yardage  of  each 
cloth,  but  this  information  often  is  unreliable  and  should 
be  checked  before  its  use  in  costing.  Also  the  styles 
change  with  the  seasons  and  it  is  necessary  to  estab- 
lish estimates  of  costs  from  short  runs  or  merely  sam- 
ples. In  such  cases,  actual  physical  dissection  of  the 
product  into  its  constituents  is  resorted  to  and  a  meas- 
ure made  of  the  kind  and  quality  and  amount  of  each 
yarn.  Dissection  is  usually  resorted  to  in  textile  fabrics 
for  this  purpose,  as  instance  of  which  might  be  men- 
tioned carpet  manufacture,  in  which  a  small  sample  is 
dissected  or  picked  apart  to  its  constituent  yarns  of 
which  the  weight  is  taken,  the  total  being  checked  against 
the  original  weight  of  the  sample  intact. 

Paper  is  a  product  the  composition  of  which  it  is  im- 
possible to  establish  by  analysis  of  the  finished  product. 
Paper  comes  in  wide  variety  of  grades,  determined 
largely  by  the  character  of  the  ingredients.  Various 
fibers  and  loaders  are  used  and  often  there  will  be  no 
assured  records  of  just  what  furnish  or  mix  is  used  for  a 
given  grade,  and  as  one  of  my  former  associates  has 
said,  this  difficulty  is  further  eomphcated  by  changes 
made  at  the  beater's  whenever  a  tearing  test  in  process 
indicates  the  paper  requires  some  modification.  As  may 
be  gathered,  the  condition  is  one  which  must  be  met  and 
solved.  The  proper  procedure  is  to  determine  by  exhaus- 
tive study,  if  necessary,  the  formula  of  each  grade  of 


k 
« 

0    £ 
3     < 

o 

c          •;    z 

kt 

z   ; 

J    I 

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S                >  i 

C                    .    UI    o 

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O                       »•    It     o 

£       -J-      I 

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w                               ; 

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i    ft 

78 


COSTING  OF  MATERIAL  79 

paper  and  then  to  maintain  accurate  records  of  the  actual 
execution  of  these  formulaB  at  the  beater's  and  to  note 
any  departure  therefrom  that  might  prove  necessary. 

Somewhat  the  same  problem  is  presented  in  cordage 
manufacture  where,  because  of  the  high  factor  in  cost 
represented  by  the  fiber,  it  is  intensely  important  that 
the  proportions  and  kinds  of  the  fiber  going  into  each 
rope  be  accurately  established  and  then  that  the  batching 
be  faithfully  carried  out  and  properly  recorded.  As  an 
idea  of  what  this  means  1,500  different  sizes  and  kinds  of 
rope  may  be  made  from  readies  composed  of  75  different 
kinds  of  yarn  representing  30  different  batches  and  pos- 
sibly 15  different  fibers  and  fillers. 

Plated  ware  presents  an  interesting  problem  in  the 
charging  of  the  plating  materials  directly  to  the  product. 
Nickel  and  silver  and  gold  are  valuable  materials  and  are 
big  items  in  the  cost  of  plating.  The  amount  of  such 
plating  materials  used  on  the  product  is  difficult  to  deter- 
mine, especially  if  there  is  a  wide  variety  in  shapes  and 
sizes.  Plating  materials  represent  a  concrete  case  of  a 
considerable  factor  in  costs  which  should  be  charged 
directly,  but  which  compel  ingenious  measures  to  do  so. 
The  easy  escape  is  through  the  inaccurate  method  of  in- 
cluding their  cost  in  expense  and  applying  this  expense 
on  the  labor  which  would  give  absolutely  invalid  results. 
A  satisfactory  procedure  is  to  establish  the  surface  area 
of  each  article  by  developing  the  surface  on  a  plane. 

A  unit  of  area  plated  in  a  given  period  establishes  a 
plating  material  cost  per  unit  and  this  may  be  attached 
to  the  article  on  the  basis  of  the  proportionate  surface 
area  it  possesses.  In  actual  execution  the  surface  rela- 
tion one  to  the  other  in  square  feet  of  the  various  articles 
produced  would  be  established  and  the  plating  materials 
used  in  the  month  distributed  on  that  basis. 


80 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


PURCHASE  REQUISITION  no 

PURCHASE  DEPARTMENT  PLEASE  ORDER O^'T^ 


/J^^ 


DESCRIPTION 


^,<^r    -^^ 


A**t£^  ^<^g-<^^!^  ^ 


USUAL  DEALER 


APPROVED 


FiGtJKE   13. — PURCHASE  REQUISITION 

This  discussion  may  indicate  tlie  scope  of  the  problem 
encountered  in  deteraiining  the  quantity,  size,  and  kind  of 
material  used  in  a  given  product.  Happily,  in  most  in- 
stances this  information  is  readily  procured,  but  in  some 
instances  it  is  a  matter  of  patient  investigation  and  great 
labor. 


Ma^rial  and  SypFLY  Purchase  Record 

NAME                                                                                ADDRESS 

t»«tCl 

r».,.„ 

-     1 

^yCe.'***^ce^     fiCje-et-^oZi^     ^         C«-t_-«_c^   /^i^^ 

^ 

4 

r 

^^:!^..  ^y-i^^^jL^^^  C        /^^^.-^^.iiii^^^X 

>^ 

/^ 

.^ 

/^^..^::^  <>1.^^jCjC^.  ^o     ^^^^^-^^-^j:^' '^  ^ 

^ 

4 

^^ 

^^^                                               y" 

Figure  14. — material  and  supply  record 


COSTING  OF  MATERIAL 


81 


REQUEST 

FOR 

QUOTATION 

Please  Quote  on  This  Sheet 
Your  Best  Price  F.  O.  B.. 


For  the  Items  Specified  Below: 

(EACH  ITEM  SEPARATELY) 


dCA.^'i^^^ 


'^^^ 


Date — sAs/ai 


DESCRIPTION 


1500# 


80a  Horse  Leather. 


THIS   I&   NOT   AN    ORDER 


REQUiaiTION  NUMBEH 


To  Premier  leather  CnmpRny. 


Corry,.  fa. 


1466 


Quotitioii  Signed       ^ -^t-^-'^^c^Sa 


PURCHASE  ORDER  NO. 


Figure   15. — quotation   inquiry 

Value  of  Material.— The  valuation  of  the  material  used 
in  production,  once  the  quantity,  size,  and  kind  are  estab- 
lished, is  accomplished  from  stores  records.  Successful 
costing  of  material  revolves  about  a  centralized  and  fully 
authorized  stores  system.  Stores  are  now  well  estab- 
lished and  well  known  institutions  in  manufacturing 
practice,  but  while  the  principles  are  well  understood  the 


in 

TO  rraalar  Laathsr  Coapaoy                                                                                o-oo          N? 
Corry.   Pa.                                                                                                              o*t.  2A5/21 

4520 

11 

■Mi^viA     freight                           MAAK  aHiFwiNT    Order  10.4026 

»•<>•      Corr7.  P».                    »p»iT  «»»iMT 

Tciwa  2%  10  days,   oat  SO        «» "«>      14S6-8tor«B 

Mil  itm 

«.»..>T, 

' 

nacm 

1 

i 
S 

: 
1 
5 
: 
i  J 

:  r 

H 

\l  Hi 

■ 

z 
S 
• 

1BOO# 

3»»  Boraa  laathar                                       at 

•  SI  ;8r 

t> 

K) 


K) 


ToPretnier  Leather   conpany 
Corry.   Pa. 


s«r«,>    freight 
'  °  •     Corry,  Pa, 
'«»-»J<  10  days,  net  30 


.ir«iNT  Order  Ilo,40P5 

14S6-Stares 


:.As/H?      «20 


Sea  Horaa  Laatbar 


Figure  16  A  axd  B. — original  and  duplicate  of  purchase  ordeb 

82 


COSTING  OF  MATERIAL 


83 


>o 


Tc^eoler  Leather  Cowponj 
Coiry,  P». 


r2A5/: 


,^9      4520 


■sHiFvi»  freight 
""^    Corry,  Ta. 
™""»E<  10  days,  net  JO 


1  •HinaiNT  Order  |io.4Q2S 
1456-Stores 


I        I        I 


>o 


Sea  Roree  Leather 


Figure    16   C. — triplicate   of   purchase    order 


applications  often  leave  much  to  be  desired.  As  an  in- 
stance, I  recall  an  investigation  of  the  accuracy  of  stores 
records  which  was  made  by  totalling  the  issues  as  repre- 
sented by  requisitions,  and  then  comparing  this  amount 
with  the  consumption  indicated  by  the  differences  in 
physical  inventories  and  the  purchases  for  the  year.  The 
former  amount  was  only  87  per  cent  of  the  latter,  indicat- 
ing an  error  of  13  per  cent.  Stores  records  should  be 
maintained  within  a  margin  of  error  of  one-half  to  2  per 
cent,  although  this  degree  can  only  be  achieved  by  per- 
fection in  the  machinery  of  stores  and  diligence  in  its 
operation. 

Material  in  modem  practice  is  ordered  from  stock 
cards  or  sheets,  although  occasionally  by  specific  requisi- 
tions for  special  orders.  Its  ordering  is  a  function  of 
the  planning  department,  its  purchase  in  charge  of  the 


84  ESSENTIALS  OF  INDUSTRIAL  COSTING 

purchasing  department,  which  may  or  may  not  be  sub- 
ordinate to  the  planning  department. 

As  illustrative  of  Material  Stock  Cards  Figures  11  and 
12  are  presented.  It  will  be  obsen'ed  from  these  cards 
that  the  amounts  ordered,  received,  and  used  are  shown 
and  the  balances  on  order,  on  hand,  or  available  are  indi- 
cated together  with  unit  prices.  Whenever  the  quantity 
on  hand  goes  below  a  low  limit  known  as  the  minimum, 
it  stimulates  a  purchase  requisition  for  a  definite  order 
quantity,  also  indicated  on  the  purchase  record.  The 
Purchase  Eequisition,  a  form  of  which  is  illustrated  in 
Figure  13,  when  finally  authorized,  goes  to  the  purchas- 
ing department.  Thereafter,  practice  varies,  although,  of 
course,  the  common  objective  is  to  secure  best  sendee  in 
delivery  and  best  price.  Assuming  a  conventional  case, 
the  purchasing  department  keeps  cards.  Figure  14,  show- 
ing the  dealers  in  each  of  the  commodities  with  certain 
descriptions  of  the  character  of  each  dealer  in  the  matter 
of  deliveries  and  prices.  Quotation  inquiries  (Figure  15) 
are  then  sent  to  each  or  to  a  select  list  of  the  dealers, 
inviting  a  price  on  the  material  specified  in  the  requisi- 
tion. L^pon  receipt  of  these  quotations  decision  is  made 
after  such  personal  negotiation  as  may  be  desired  as  to 
whom  the  order  is  to  be  given.  A  purchase  order,  illus- 
trated in  Figure  16,  is  then  made  out  in  triplicate,  as  indi- 
cated. The  original  goes  to  the  dealer,  the  first  copy  stays 
in  the  purchase  department  for  follow-up,  and  the  second 
copy  goes  to  the  storeskeeper.  The  original  has  a  detach- 
able acknowledgment  slip  requesting  promise  of  delivery 
and  immediate  return  of  the  slip.  Upon  receipt  of  this 
slip  the  date  of  acknowledgment  and  promise  of  delivery 
are  entered  on  the  copy  of  the  order  in  the  purchasing 
department.  The  storeskeeper 's  copy  does  not  show  the 
price  and  sometimes  the  quantities  are  omitted,  although 


COSTING  OF  MATERIAL 


85 


this  latter  procedure  is  an  optional  affair.  The  object  in 
not  showing  the  quantity  is  to  guard  against  the  possible 
temptation  to  omit  count  on  receipts.  This  is  a  very  real 
consideration,  for  frequently  in  the  rush  of  a  big  day's  re- 
ceipts the  count  may  be  slighted  and  the  order  used  to  re- 
port the  quantity  received.    Receiving  slips  are  made  out 


RECEIVING  RECORD 

N9 

4097 

Received 
From 

AilrlreBR 

EXPRES5 

FREIGHT 

PARCEL   POST                1 

WKISHT 

PAID 

COLLECT 

WEIGHT 

PAID 

COLLECT 

WEIGHT 

QUANTITY 

MSCRJPTION 

WEIGHT 

fvcbut  Onlu  No. 

BY 

DATE 

BY 

Hmufastviiiu  ar  AMERICM  SALES  BOOK  CO.,  UaiTB,  NlUlU  Fuuw  ■•  T. 

Figure  17. — receiving  record 


by  the  storeskeeper  as  indicated  in  Figure  17.  The 
receiving  slip  goes  to  the  purchasing  department  and 
from  it  the  quantity  of  material  received  is  noted  on  the 
copy  of  the  order  in  the  purchasing  department. 

Distribution  of  Invoices.— In  connection  with  these 
forms  there  are  some  things  to  be  noted  particularly. 
The  purchase  requisitions  show  the  account  to  which  the 
charge  is  to  be  made,  or,  if  it  is  an  expense  item,  the  code 
symbol.    This  same  account  designation  is  copied  on  the 


86  ESSENTIALS  OP  INDUSTRIAL  COSTING 

purchase  order  in  the  place  provided.  When  the  invoice 
arrives  the  copy  of  the  order  gives  the  information  nec- 
essary to  check  and  distribute  the  invoice,  which  is  as 
follows : 

Quantity  received 

Price 

Distribution  or  charge 

The  matter  of  distribution  is  very  important,  because 
it  is  the  guide  which  fixes  the  point  of  entrance  of  the 
charge  into  the  books.  The  direct  connection  of  the 
account  symbol  on  the  purchase  requisition  with  the 
invoice  eliminates  lost  motion,  and  simplifies  and  insures 
accuracy  in  distribution. 

As  a  guide  for  the  proper  charge  on  anything  pur- 
chased it  is  good  practice  to  compile  a  detailed  list  of 
all  items  composing  the  various  accounts  and  of  the  sub- 
sidiary code  symbols  of  expense.  An  illustration  of  such 
a  list  is  shown  in  Figure  18.  This  shows  the  composition 
of  the  asset  accounts,  the  raw  materials,  and  articles 
considered  as  stores,  and  the  index  of  code  sjTubols  for 
expense,  of  which  latter  more  in  a  later  chapter. 

Figure  18. — Typical  Instructions  for  Invoice  Distribution 

STANDARD  INSTRUCTIONS 

Serial  No.  2  Issued  to 

Date  Issued:  April  22nd,  1920 

SUBJECT:  Invoice  Distribution. 

As  assistance  in  makinsr  out  Material  Requisitions  and  makinsr  the 
proper  charge  for  Shop  Ordei's,  we  assume  that  the  following  will  be 
of  assistance. 

"We  cany  accounts  in  our  General  Ledger  which  require  the  classifica- 
tion of  various  purchases  according  to  their  captions.  These  accounts 
are  as  follows  and  a  general  idea  of  the  items  to  be  charged  to  them  is 
indicated  therewith: 


COSTING  OF  MATERIAL 


87 


Steel; 


Stores: 


Blade  steel 

Acid 

Gaskets 

Resin 

Spring  steel 

Alcohol 

Gauges 

Rivets 

Bolster  iron 

Alundum 

Glass 

Rollers 

Lining  iron 

Aprons 

Gloves 

Sand 

Babbit  metal 

Glue 

Sandpaper 

German  Silver : 

Balls 

Goggles 

Saws 

All  silver  in  strips 

Beeswax 

Graphite 

Screws 

used  for  knife  ma- 

Belting 

Grease 

Shellac 

terial 

Belt  cement 

Grease  cups 

Shear  bids. 

Belt  dressing 

Grindstones 

Snips 

Packing  Material : 

Belt  hooks 

Hacksaws 

Soap 

Labels 

Bolts 

Hammers 

Soda  ash 

Knife  boxes 

Bricks 

Handles 

Stamps 

Packing  cases 

Brooms 

Holders 

Steel,  CR 

Brushes 

Iron 

Rex 

Brass : 

Buff  sections 

Joints 

Razor 

All    sheet   brass    in 

Burners 

Latches 

Stone 

strips  or  rolls  used 

Bushings 

Lead 

Stools 

for  knife  material 

Cans,  oil 

Leather 

Suet 

Carborundum 

Lime 

Tacks 

Covering  Material : 

Castings 

Mills 

Tallow 

Celluloid 

Coal 

Nails 

Tallow  sticks 

Boxwood 

Coil  springs 

Nippers 

Taps 

Redwood 

Compound 

Nitrate 

Tees 

Stag 

Crocus 

Nuts 

Thermos  rods 

Pearl 

Cuspidors 

Oil 

Thinner 

Fibre 

Cushions,  rub. 

Packing 

Tripoli 

Hard  rubber 

Cutters 

Padlocks 

Twine 

Fancy     handles     of 

Dressers 

Paint 

Valves 

any    kind    such    as 

Drills 

Paper 

Vises 

metal,  ivory,  etc. 

Drill  rod 

Paste 

U's 

Elec.  lamps 

Pegs 

Washers 

Purchased  Parts : 

Ells 

Pliers 

Waste 

Scales,     bales,     cle- 

Emery 

Pins 

Wax 

vises,  or  shackles 

Emery  cloth 

Pipe 

Wheels 

Chains,   shields   not 

Felt 

Plugs 

Wire 

our  make 

Files 

Pyralin 

Wrenches 

Nail  blades,  etc. 

Fire  clay 

Pumice  stone 

Zinc 

Forge  plates 

Rags 

Frame  blocks 

Reflectors 

Building  Account: 

All  buildings  except  those  dwellings  carried  under  separate  accounts, 
including  foundations  and  construction. 
Machinery  and  Tools: 

All  machinery,  machine  foundations,  hand  and  foot  machines,  machine 
guards  or  safety  devices,  blowers,  furnaces,  forges,  dies,  patterns,  pol- 
ishing wheels,  shafting,  hangers,  bearings,  belting  in  use,  marking 
blocks,  box  and  plates,  machine  attachments,  shears,  drops,  wheel 
frames,  balancing  rocks,  arbors,  tumbling  barrels,  presses. 


88  ESSENTIALS  OF  INDUSTRIAL  COSTING 

Steam  Power: 

Boilers,  boiler  feed  pumps,  feed  water  heaters,  engines,  blower  for 
draft,  stacks,  steam  mains  and  valves. 
Water  Power: 

Water  Wheel. 
Electrical  Equipment: 

Generators,  motors,  switchboards,  starting  boxes,  pyrometers,  amme- 
ters, power  feed  wiring,  lighting  wiring. 
Permanent  Fixtures: 

Elevators,  galvanized  blower  pipes,  factory  phone  system,  sprinkler 
system,   fire   extinguishers,   etc.,   lavatories,   water  closets,   watchmen's 
clocks,  water  pump,  water  tanks. 
Pipes  and  Fittings: 

All  heat  and  water  pipes  (not  connected  with  sprinkler  system)  and 
radiators,  etc. 
Factory  Furniture  and  Office  Equipment : 

Trucks,  racks,  benches,  stools,  lockers,  filing  eases,  desks,  chairs,  time 
clocks  and  racks,  tote  boxes,  vises,  wheelban-ows. 

(Note:     Eefer  to  Expense  Analysis  for  Code  for  Expense  Charges, 
Chapter  9.) 

Classification  of  Material  Control  Accounts.— This  list 
also  shows  the  policy  of  classifying  important  material 
accounts,  which  is  done  to  localize  jxtssible  error  in  the 
material  transactions.  For  instance,  in  a  cutlery  plant 
the  important  items  of  material  are : 

Steel 
Brass 

Nickel  silver 
Covering  material 
Packing  material 
Purchased  parts 

and  in  a  knitwear  plant : 

Yarn, 

Trimmings 

Chemicals 

Cases 

Packing  material 

and  in  a  cordage  plant : 

^Manila  hemp 

Sisal 

Isal 

Jute 

Oil,  whiting  and  tar 


COSTING  OF  MATERIAL 


89 


VOUCHER  RECORD 

Date  Invoice  Received                                        V.  R,  No. 

Price  Check  by                                  Extension  Check  by 

Received  Date                                      Receiving  Shp  No. 

Freight  or  Express 

On  Rochester  Statement 

DISTRIBUTION 

ACCOUNT 

AMOUNT 

ACCOUNT 

AMOUNT 

FiGUEE    19. — VOUCHER    RECORD 

Accordingly  the  raw  material  accounts  are  classified 
in  this  manner  in  each  of  the  cases  cited. 

It  is  apparent  that  by  this  subdivision  of  accounts  it  is 
easier  to  check  the  balance  with  the  physical  inventory 
and  so  measure  the  accuracy  of  the  current  records  of 
material  movements.  Each  of  the  accounts  is  charged 
with  the  purchases  and  credited  with  the  issues  indicated 
by  the  storeroom  requisitions.    Should  a  difference  be- 


90  ESSENTIALS  OF  INDUSTRIAL  COSTING 

tween  the  ledger  and  physical  inventory  balance  be  en- 
countered the  subdivision  of  the  accounts  makes  it  easier 
to  locate  the  source  of  the  error. 

Vouchers.— This  describes  how  the  quantities,  prices, 
and  distribution  are  taken  from  the  purchase  order  in 
the  purchase  department.  This  information  for  con- 
venience and  accuracy  is  entered  on  a  voucher  slip  when 
single  bills  are  entered,  such  as  Figure  19,  which  is  at- 
tached to  the  invoice,  or  a  full  sized  voucher  is  used 
against  which  several  bills  are  collected  from  the  same 
dealer.  Frequently  this  voucher  is  a  duplicate  copy  of 
the  check  drawn  in  payment,  as  illustrated  in  Figure  20. 
The  invoice  is  then  entered  in  the  Voucher  Register  as 
described  at  length  in  a  previous  chapter.  The  invoice, 
or  a  copy,  is  then  sent  to  the  planning  department  where 
the  entry  on  the  stock  records  is  made,  together  with  the 
unit  price. 

Costing  of  Hajidling  Expense.— In  connection  with 
handling  expense  there  is  an  important  consideration 
which  modern  costing  has  established  in  line  ^vith  the 
principle  of  charging  all  expenditures-  as  directly  to  the 
product  as  possible.  This  refers  to  the  addition  to  the 
billing  price  of  the  transportation  and  hauling  charges 
and  sometimes  of  the  cost  of  handling  and  storing.  In  my 
experience  the  usual  custom  is  to  add  freight  and  express 
and  cartage  to  the  billing  price,  and  to  carry  the  stock- 
room expense  as  a  contributing  department,  which  is 
charged  into  the  productive  departments.  There  are  criti- 
cisms of  this  method  which  may  properly  be  made  to  the 
effect  that  this  handling  expense  should  be  added  to  the 
material  cost.  If  this  is  desired,  and  occasionally  it  is  im- 
perative, the  expense  of  the  stock  department  may  be  ac- 
cumulated and  the  ratio  determined  of  its  total  to  the 
value,  weight,  or  any  other  unit  of  material,  either  pur- 


14*7  FLOOR  NICHOLAS  BUILDING,  TOLtOO.OHIO 
TO  TMC  fte-7 


•    6.60 

5.50 

95.69 

?.50 

110.29 

2.21 

loii.08 


Home  Savings  Bank     ToLEOO.OhIO    June  11,   1917. /^j5^ 
Toledo,  Ohio  A  v\ 


BiVY  TO  THE  ORDER  OF 

The  Walding,  Klnnan  ft  llarviii  Co.. 
Toleio.  Ohio. 


>4                 «   6A                                                                                          WM 
J«                     5.J0 

The  n^Ulng,  KiBBan  a  Barvla  Oo»,                                                                                         ^ 
ToUde.  Ohle.                                                                                                            ■? 

f-ACE           /jO       LINE         t?)j                                                     MONTH  OF    Ifay    1917,                        C"-  N<W.27j64 

BKB                        ♦<»  '      1     NO.  2 

HO.  3 

NO.  4 

NO..       1        NO..      1                         1                                                            1 

MniXNC 

CASH  TRANSFER 

EOWPMENT 

DISCOUOT  ON  PURCHASES 

' 

SALES  MISCEI. 

RES.I1EPAWS 

LEERS 

GENERAL  OfTlCE 

MOLDS 

FACTORY  ADMIN. 

CRATES 

ROYALTY 

RJEL 

SELUNG-CENERAL 

MAT.  MIMNC 

' 

1.  2  AND  J 

STORES 

9? 

64 

-         4 

rRElCHr 

n. 

to               DR.  CXPE^SE 

EXP.  BOTTLE 

a  M.  EXPENSE 

f, 

,^             MOLD  EXPENSE 

REPS.  FURNACES 

-      1  FFR< 

SAND  DBPT. 

-      MAOdNES 

BUILDINGS 

-      MOUM 

EQUIPMENT 

-      PLANT 

EX£LOfilVES 

FUEL 

PAYROLLS 

STORES 

1 

EXPENSE 

1 

REPAIRS 

1 

L-J_- — 

1 1 

— ^ 

:             - 

~]         1 

i—trrn 

— t 

!lr 

I    " — 1 

n^ 

APPROVED                 __ 

r^2s 

A.  ^\  i^if 

(  5^  L    )    V  "V 

Vo,; ; 

Figure  20. — combined  voucher  and  voucher  check 
91 


92 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


chased  or  issued  (Figure  21).  This  ratio  will  then  be 
added  to  the  unit  price  if  it  is  to  be  applied  on  purchase, 
or  to  the  requisition  if  it  is  to  be  applied  on  issues. 
Whichever  way  it  is  applied  the  expense  for  the  month 
of  the  stock  department  must  be  distributed  to  the  Mate- 
rial and  Stores  accounts. 


Rnnd 

MATERIAL    COST                                ,^^ 

Product                                                                                                  'n 

Miterial 

Storage 

Misc£UaiKon& 

Tot«l 

QuMllr 

UiM  CmI 

TMal 

OuaUl? 

PoM 

WiCmi 

T.UI 

TMab 

ProducUoa 

Cost  Per 

Cost  Per 

Cost  Per 

Figure  21. 


-FORM  INDICATING  METHOD  OF  APPLYING  STORAGE  AND  HANDLING 
EXPENSES    TO    THE    COST    OF    MATERIAL 


Material  Stock  Records.— Up  to  now  the  stock  and  pur- 
chase records  and  the  handling  of  invoices  has  been  con- 
sidered and  it  is  timely  to  discuss  the  matter  of  material 
issue.  The  movement  of  material  from  stock  is  actuated 
from  the  planning  department  by  a  requisition  such  as 
illustrated  in  Figure  22.  These  requisitions  are  signed 
when  filled  by  the  storeskeeper  and  returned  for  entry 
on  the  stock  records,  where  they  are  priced.     After 


COSTING  OF  MATERIAL 


93 


pricing  they  are  extended  and  then  summarized  to  show 
the  consumption  of  material  in  each  of  the  accounts  out- 
lined for  the  particular  system.  The  requisition  also 
indicates  the  charge,  whether  to  factory-order  classifica- 
tion, or  process,  and  a  summary  of  the  requisitions  for 
the  month  are  entered  on  the  Material  Requisition  Dis- 
tribution described  and  illustrated  in  Chapter  IV,  pages 
61-63. 


MM 

MATERIAL    REQUISITION 

Urt 

M 

"i»TF 

CHARRP 

J 

QUANTITY 

DESCRIPTION 

UNIT  PRICE 

TOTAL  VALUE 

one  ITEM  ONLY  ON  EACH  ftEQUISmOH 

SIGNED 

Figure  22. — material  requisition 


The  stock  records  have  been  stated  to  show  a  minimum 
quantity  which  is  established  arbitrarily  and  which  is 
generally  figured  as  a  certain  percentage  of  the  total 
requirements.  This  figure  for  each  kind  and  size  of  mate- 
rial is  determined  by  the  planning  department  and  it  is 
based  upon  an  estimate  of  the  annual  output  of  the  plant. 
Generally  the  minimum  is  three  months,  or  twenty-five 
per  cent  of  the  estimate,  but  sometimes  more  and  some- 
times less.  It  is  a  factor  fixed  by  experience  in  secur- 
ing delivery  on  the  particular  article.     If   experience 


94  ESSENTIALS  OF  INDUSTRIAL  COSTING 

shows  that  a  commodity  requires  a  six-week  period  for 
shipment  and  two  weeks  for  transit,  the  total  eight  weeks 
would  be  the  minimum.  Generally,  however,  a  margin  for 
contingencies  should  be  added. 

The  order  quantity  is  established  by  buying  condi- 
tions. The  economical  order  unit  is  that  which  will  be 
large  enough  to  receive  the  best  price  and  yet  not  be  so 
large  as  to  constitute  too  big  a  proportion  of  the  yearly 
requirements.  This  consideration  has  to  do  with  the  en- 
gagement of  working  capital,  the  main  object  being  to 


REQUEST  FOR  COUNT 

Date 


Storekeeper  :- 

Kindly  count  the  following  item  and  advise 
on  this  slip  the  result. 

Description 

size 

Signed 


Date 


Count 


Signed 

Storekeeper 


FiGUKE    23. — REQUEST   FOR   COUXT 

minimize  its  occupation  in  inventory  to  the  lowest  limit 
consistent  with  judicious  purchase,  and  assured  supply 
for  production.  This  is  also  a  duty  of  the  planning 
department  and  is  touched  upon  here  only  in  passing  and 
for  completion. 

Whenever  the  stock  records  indicate  that  the  minimum 
has  been  reached,  a  purchase  requisition  is  made  out  as 
previously  described,  also  a  Count  Request  (Figure  23) 
is  sent  to  the  storeskeeper,  who  is  instructed  to  make  an 
immediate  count  of  the  item  specified.  Upon  the  return 
of  the  count  request  with  the  inventory  noted  on  it,  the 


COSTING  OF  MATERIAL 


95 


count  is  compared  with  stock  records  and  if  adjustment  is 
indicated,  it  is  made.  By  this  method  every  item  is  in- 
ventoried whenever  it  reaches  a  minimum,  which,  on  a 


BIN  QtAG 

ARTICLE 

UNIT                                               MIN. 

RECEIVED                1 

Oiy  HAND 

USED                    1 

0*TE 

OUANTITV 

DATE 

quantitV 

Figure  24. — bin  tag 


25  per  cent  basis — the  general  average — would  mean 
at  least  four  inventories  a  year.  A  summary  record  of 
these  counts  and  book  balances  is  kept  comparatively,  and 


96  ESSENTIALS  OF  INDUSTRIAL  COSTING 

examination  of  it  gives  a  fair  measure  of  the  accuracy 
of  the  stock  records.  It  is  also  a  constant  reminder  to 
the  storeskeeper  for  care  and  faithfulness  in  reporting 
the  material  movements  of  which  he  has  charge.  As  a 
supplementary  record  many  companies  use  a  bin  tag 
which  is  attached  to  all  items  and  which  in  effect  is  a 
condensed  stock  record.  To  this  Bin  Tag,  illustrated  in 
Figure  2-i,  are  posted  all  receipts  and  withdrawals  so 


W.J.D.&SONS,lnc. 

Bale  No. 


Lot Weight 

Tare 


Mark  Net 


Scoured 
Weight- 


FlGXTBE    25. BALE    TAG 

that  the  storeskeeper  is  aware  of  the  condition  of  stock 
balances.  It  is  also  good  practice  to  show  the  minimum 
on  the  bin  tag  and  then  the  storeskeeper  can  notify  the 
stock  record  clerk  whenever  the  bin  tags  show  down  to 
the  minimum.  This  serves  as  a  tickler  to  the  stock  record 
clerk  who,  after  posting  his  requisitions,  can  check  off  the 
memorandum  sent  by  the  storeskeeper.  If  the  stock  rec- 
ords do  not  reflect  a  below-minimum  condition  and  the 
storeskeeper 's  memorandum  does,  an  investigation  is  a 
helpful  check  on  the  stock  records. 

Certain  materials,  such  as  textile  fibers  or  yarn,  like 
wool,  cotton,  manila  hemp,  or  sisal  come  in  bales,  which 


COSTING  OF  MATERIAL 


97 


are  weighed  and  recorded  by  the  lots  in  which  they  are 
received.  This  is  done  in  order  to  trace  variations  in 
quality  and  also  to  prevent  mistakes  in  issue  of  incorrect 
goods  of  fibers  or  yarns  which,  to  the  unskilled,  might 
look  alike.  Lot  tickets  and  bale  tags  are  used  for  this 
purpose  as  illustrated  in  Figure  25. 

This  describes  the  handling  of  material  and  the  steps 
which  lead  to  the  Material  Requisition  Distribution  as  an 


Form  2    2SM  MO 

§                    SUPPLY    REO 

CHARGE  DEPT,.  /  ^^ 

UISITION 

No._ 
n»TF 

CCo.  7M1 

V^/C 

QUANTITY 

DESCRIPTION 

UNIT  PRICE 

TOTAL  VALUE 

/^A 

(y  V"  /d^^^Z^-^ 

u 

J 

^0 

ff 

/ 

o~e  ,TC-  o..,  o.  „CH  .cou,s,r,o» 

SIGNED 

^/^y^/T 

Figure  26. — supply  eequisition 


original  source  of  entry  into  costs  and  the  control  thereof 
in  the  general  books. 

Costing  of  Supplies. — Supplies  are  handled  in  an 
identical  manner,  using  the  same  stock  cards  or  sheets. 
The  Supply  Eequisition,  Figure  26,  is  printed  on  differ- 
ently colored  stock  than  the  Material  Eequisition  and 
further  distinguished  from  the  latter  by  the  large  initial 
''S"  where  the  Material  Eequisition  shows  "M."  The 
same  purchase  procedure,  the  same  pricing  are  done  with 


98  ESSENTIALS  OF  INDUSTRIAL  COSTING 

supplies  as  material  and  the  summary  of  issue  requisi- 
tions is  compiled  in  the  exact  manner  as  of  Material 
Requisitions,  the  whole  leading  to  the  Supply  Requisition 
Distribution  discussed  in  the  preceding  chapter  as  a  fun- 
damental source  of  costing  data.  The  Supply  Requisi- 
tion shows  the  expense  symbols  and  the  summaries  of 
these  are  stated,  of  course,  in  the  distribution. 

Scrap,  Waste  and  Spoilage.— The  matter  of  the 
quantity,  size,  kind,  price,  and  destination  of  material 
has  been  treated  at  length,  and  in  many  manufactures 
this  particular  discussion  could  be  concluded  as  com- 
plete for  the  subject.  Unfortunately,  however,  there  is 
another  phase  of  material  costing  which  is  universally 
present  in  a  minor  way,  but  which  in  some  manufactures 
is  of  great  influence  and  that  is  the  accounting  of  scrap  or 
waste  or  spoilage.  Scrap  or  waste,  and  spoilage,  are 
terms  designating  a  part  of  the  material  which  does  not 
continue  to  normal  completion  of  the  manufacturing  op- 
erations nor  appear  in  the  final  form  of  the  product.  This 
material  is  a  kind  of  precipitate  thro^^^l  off  by  the  pro- 
ductive processes  and  presents  a  problem  for  equitable 
treatment  in  costs  which  equals  in  complexity,  if  not  in 
money  value,  that  of  expense  distribution. 

Scrap  or  waste  is  the  loss  of  material  as  an  inherent 
and  repetitive  occurrence  in  the  processes,  while  spoil- 
age is  the  loss  of  material  due  to  original  defects  in  raw 
material,  accident,  carelessness,  or  failure  to  pass  inspec- 
tion limits.  It  is  a  rare  commodity  where  the  finished 
product  represents  a  transformation  in  toto  from  the 
original  material  and  it  seems  to  be  an  inexorable  con- 
dition that  loss  of  material  or  value  or  duplicate  process- 
ing of  a  portion  must  accompany  all  production  and  be 
involved  at  some  point.  So  that  in  practically  every  in- 
dustry the  conversion  of  raw  material  to  the  finished 


COSTING  OF  MATERIAL  99 

product  is  attended  by  loss  or  the  expense  of  reclamation. 
The  terms  used  to  designate  this  loss  vary  with  the 
nomenclature  of  the  particular  industry.  Scrap  is  the 
word  for  the  metal  working  industries,  waste  for  the 
textile,  cullet  for  the  glass,  broke  for  paper,  dross  in 
smelting,  gates  and  sprues  in  foundries,  etc.  All  refer 
to  a  portion  of  the  material  which  contributes  to  the 
making  of  the  final  product,  but  which  has  lost  immediate 
availability  for  actual  inclusion  in  that  product. 

Sometimes  the  scrap  or  waste  may  be  reworked  and 
finally  reach  the  state  of  finished  product  and  sometimes 
it  can  have  no  ultimate  identity  as  finished  product  and  is 
predestined  to  be  scrap  beyond  reclaim.  In  the  latter 
case  it  might,  however,  possess  salvage  value,  that  is, 
command  a  market  and  price  and  whenever  such  a  price 
reaches  sizeable  proportions  in  comparison  with  the  prin- 
cipal product,  scrap  takes  on  a  higher  dignity  and  is 
known  as  a  by-product. 

It  is  the  basic  practice  in  costs  to  have  the  finished 
product  or  the  good  production  bear  the  cost  of  all  mate- 
rial consumed  with  the  exception  of  the  admission  of  the 
sale  of  scrap  or  waste  as  a  proper  credit.  The  arbiter 
6f  this  credit  is  market  value  and  if,  perchance,  the  par- 
ticular scrap  possesses  no  such  disposal  value,  the  full 
cost  of  the  original  material  must  be  borne  by  the  finished 
product. 

Costing  of  Scrap.— The  manner  of  handling  scrap  or 
waste  and  spoilage  in  costs  varies  with  the  degree  of  their 
importance  as  factors  in  the  results.  The  value  of  the 
material  and  the  relative  amount  of  scrap  are  determi- 
nants of  this.  For  instance,  scrap  or  waste  may  range 
from  almost  nothing  to  10  per  cent  of  total  material  and 
it  has  been  mentioned  that  material  ranges  from  20  to 
80  or  90  per  cent  pf  costs,  so  that  scrap  or  waste  might 


100 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


be  as  much  as  8  or  9  per  cent  of  the  total  cost.  This 
shows  it  to  be  at  times  a  matter  of  great  moment  which 
must  be  carefully  accounted.  The  method  of  account- 
ing varies  with  the  operating  conditions,  and  the  follow- 
ing examples  illustrate  the  conditions  usually  encoun- 


MELT    REPORT 

POUNDS 

PRICE                  AMOUNT 

METAL  USED 

Pig  No.  1 

Pig  No.  2 

Pig  No.  3 

Scrap 

Total  Metal  Used 

PRODUCTION 

Bad  Castings 

Grates  &  Risers 

Good  Castings 

Total  Production 

Unaccounted  For  Loss 

%  Unaccounted  For  Loss 

%  Bad  Castings 

^0  Gates  &  Risers 

%  Good  Castings 

%  Total 

COST  PER  POUND  OF  METAL 

. 

FiGUEE    27. — MELT    EEPOET 


tered  and  the  essential  accounting  devices  for  costing 
the  scrap  or  waste. 

In  a  tableware  plant  where  sheet  brass  or  copper  is 
used  and  the  initial  operation  is  the  press  blanking  of 
irregular  shapes,  the  proper  procedure  would  be  to  attach 
to  each  part  the  proportion  of  loss  on  scrap  entailed  in 


COSTING  OP  MATERIAL 


101 


its  production.  This  is  accomplished  by  accumulating 
data  as  to  the  scrap  and  crediting  the  cost  of  the  part 
with  the  sales  value  of  the  scrap  in  which  its  production 


FoffBNo.  101.    M-li-a-lJ,    SUMM 

CARDING   REPORT 

WEEK   ENDING - — 19« 

ITEM 

POUNDS 

TOTALS 

GRAND  TOTALS 

PSn  CINT. 

PtH  CKN1 

SPINNING  ' 

r : 

1    ..oa.N. 

\r« 

PICKING       )  „o„,„„ 

AND          / 
CARDING     \   TIIUNK    WMTC 

1    swEep*      

1     CAWO    GTRtPS 

FLY              1 

TOTAL  FLY  FRAME  WASTE.  .... 
PRODUCTION  SPEEDERS     .... 
INVISIBLE  WASTE 

PRODUCTION 

TOTAL 

HANK 

HANKS 

POUNDS 

SPINDLES 

REMARKS 

1 

Figure  28. — carding  report 


resulted.  If  the  order  or  lot  cost  method  is  being  used, 
the  order  or  cost  must  carry  all  material  cost,  including 
scrap  or  waste,  the  good  production  carrying  the  burden. 


102         ESSENTIALS  OF  INDUSTRIAL  COSTING 

In  foundries  there  is  a  melting  loss  which  must  be 
charged  against  the  output.  The  manner  in  which  this 
is  done  is  shown  in  Figure  27,  which  also  serves  as 
a  production  report. 

In  textiles  the  problem  of  waste  is  generally  handled 
by  the  process  method.  The  quantity  of  material  enter- 
ing a  process  is  charged  against  the  process,  the  material 
leaving,  when  adjusted  for  inventories,  is  a  net  figure 
which  differs  from  the  charge  by  the  waste  developed. 
The  production  report  (Figure  28)  as  used  in  a  cotton 
mill  shows  the  waste  developed  and  constitutes  an  im- 
portant record  for  the  proper  costing  of  the  net 
material  used.  With  proper  credit  for  the  waste 
the  net  material  value  is  computed  and  charged  into  the 
succeeding  process.  If  more  than  one  kind  of  stock  is 
processed,  it  is  desirable  and  necessary  for  full  accuracy 
to  keep  the  records  by  the  kinds  of  stock. 

Sometimes  when  the  element  of  scrap  is  small,  as  in 
iron  or  steel  metal  working,  the  sale  value  of  scrap  is 
credited  to  manufacturing  expense,  the  product  being 
charged  wdth  all  the  material. 

The  refinement  of  the  method  must  be  governed  by  the 
practical  consideration  of  the  importance  of  the  item. 
It  can  be  emphatically  stated  that  the  practice  of  regard- 
ing the  sale  of  scrap  as  a  credit  to  profit  and  loss  is  a 
weak  expedient  and,  in  some  industries,  ruinous  to  accu- 
racy and  subversive  of  the  entire  motive  of  costing. 

The  Costing  of  Spoilage.— Spoilage  is  a  variable  but 
its  accounting  is  as  necessary  as  that  of  scrap.  It  must 
first  be  reported  and  that  is  accomplished  by  means  of 
the  Spoilage  Slip  illustrated  in  Figure  29.  This  slip  is 
costed  as  shown  and  the  charge  for  the  spoilage,  less  its 
scrap  value,  carried  in  manufacturing  expense  for  distri- 
bution over  the  entire  production,  or  localized  as  a  partic- 


COSTING  OF  MATERIAL  103 

ular  article,  order,  or  lot.  In  some  manufactures  a  pecu- 
liar and  deceptive  condition  exists  which  might  be  illus- 
trated by  sugar  refining.  In  this  industry  the  essential 
raw  material  is  sucrose,  which  is  the  content  of  the  vehicle 
transported  through  the  manufacturing  processes.  At 
all  points  any  waste  or  spoilage  developed  is  regarded 
lightly,  simply  because  it  can  be  readily  reclaimed  and  re- 
enter the  stream  of  production.     This  condition  in  one 


SPOILED  OR  DEFECTIVE  GOODS 

No 

Dept Date 


Order  No.  Part  No. 


No.  Pieces  Name  of  Part 


Cause 


Man's  No. Signed 


FOREMAN 


BOTH  COPIES  MUST  BE  SENT  TO  PLANNING  DEPARTMENT  AT  ONCE 


PLANNING  DEPARTMENT 


COST  DEPARTMENT 


Schedule  Adjusted 


Labor 


Replace  Order  Entered 


Expense 


Materia! 


Total 


Figure  29. — spoiled  or  defective  goods  report 

refinery  held  true  right  up  to  the  packing  room,  where 
heavy  breakage  of  the  lump  sugar  was  entailed,  but  no 
record  kept  because  the  broken  sugar  could  be  dissolved 
and  reworked.  It  appeared  as  if,  because  the  sucrose  con- 
tent could  not  be  lost,  it  was  not  of  importance  how  fre- 
quently it  might  undergo  manufacture.  In  a  case  like 
this,  the  costs  are  adequately  handled  by  having  the  good 
production  bear  all  expense  of  working  and  reworking, 
but  as  a  matter  of  managerial  policy  the  absence  of  re- 


104  ESSENTIALS  OF  INDUSTRIAL  COSTING 

ports  showing  the  current  output  with  the  amount  revert- 
ing to  production  again,  certainly  disregarded  an  obvious 
control  of  operating  efficiency. 

Accounting  of  Seconds.— Seconds,  although  not  chiefly 
a  matter  of  material,  represent  a  perversion  of  manufac- 
turing function  and  it  is  possibly  timely  to  consider  their 
handling  in  costs.  Seconds  refer  to  that  portion  of  the 
product  which  cannot  command  full  selling  price  and 
must  be  disposed  of,  if  at  all,  at  some  price  which  in- 
volves a  lessened  margin  or  a  loss.  In  most  cases  seconds 
are  handled  by  including  their  sales  value  in  the  sales, 
and  their  full  manufacturing  cost  in  the  cost  of  sales,  so 
that  the  effect  of  the  second  is  directly  indicated  in  manu- 
facturing profit  or  loss. 

Marginal  Values  of  Material.— There  are  manufactures 
in  which  the  raw  material  is  subdivided  or  graded  and 
in  which  no  market  values  exist  that  might  be  used  to 
determine  the  material  cost  of  the  resultant  subdivisions 
or  grades. 

This  condition  is  encountered  in  the  leather  industry, 
as  cited  by  S.  H.  Bunnell,  when  a  hide  is  split  several 
times  and  is  processed  differently,  resulting  in  various 
finished  products.  The  problem  here  is  in  the  absence  of 
a  market  for  the  raw  material  as  split — ^what  basis  of 
division  can  be  used?  If  the  original  cost  of  the  hide  were 
prorated  by  weight  over  its  splits,  costs  might  result  in- 
dicating a  loss  on  some  products  and  an  excessive  margin 
on  others.  In  a  word,  it  is  obvious  that  splits  are  not 
equal  in  value  to  grain  side  and  differ  among  themselves. 
If  no  market  price  can  be  ascertained  for  the  splits,  the 
only  recourse  is  to  work  back  from  the  selling  prices  of 
the  finished  leather  a  proportion  against  which  the  cost  of 
the  whole  hide  may  be  distributed. 

This  same  condition  exists  in  wood  working  plants 


COSTING  OF  MATERIAL  105 

where  lumber  used  for  a  given  article  may  leave  waste 
pieces  sufficiently  sizable  for  other  articles.  Again  the 
question  arises,  Shall  the  division  of  material  costs  be 
based  on  board  feet  or  shall  it  be  conceded  that  the  lesser 
pieces,  the  waste,  possess  lesser  value  and  if  so  what  shall 
establish  this  value?  Here  again,  unless  a  market  price 
is  available  there  is  nothing  left  but  an  arbitrary  price 
which  may  be  determined  from  the  selling  price  of  the 
resulting  articles  or  by  judgment.  It  is  preferable  to 
have  some  standard.  Fortunately,  in  the  world  as  con- 
stituted to-day,  there  is  a  market  for  almost  every  form 
of  scrap  or  waste  and,  when  this  is  so,  the  material  value 
for  the  waste  is  the  market  price.  If  there  is  no  market 
price,  it  is  better  to  deduce  one  from  relative  selling 
prices  of  the  finished  article  than  to  select  one  arbitrarily. 
Costing  of  Material  of  Fluctuating  Prices.— This  chap- 
ter on  material  costs  would  not  be  complete  without  con- 
sideration of  the  handling  of  those  materials  in  costs  that 
might  be  termed  speculative,  because  of  the  frequent  or 
wide  fluctuation  in  the  purchase  prices.  Cotton,  brass, 
copper,  hemp,  and,  to  some  extent,  rubber,  are  basic 
materials  which  are  thus  characterized.  There  is  no 
great  difficulty  in  charging  these  materials  into  costs, 
which  is  done  in  one  or  two  diiferent  ways.  The  bills  are 
charged,  of  course,  in  total  with  transportation  added  to 
the  respective  accounts,  and  the  bills  are  similarly  shown 
on  the  stock  cards.  When  the  material  is  issued  to 
process  the  requisition  must  be  extended  either  with  a 
changing  price  as  each  lot  of  material  is  used  up  or  by 
an  average  price  of  all  lots.  The  average  price  is  the 
common  practice  and  is  generally  the  easiest.  There  are 
industries,  like  the  textile,  in  which  the  lots  are  recorded 
in  stock  separately  and  then  the  price  may  be  used  of 
the  lot  from  which  the  issue  was  actually  made. 


106 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


The  problem  of  costing  is  not  at  this  i>oint  of  pricing 
— it  is  in  the  taking  out  of  this  varying  material  price  in 
the  cost  of  sales  when  used  to  determine  profit.  It  is 
obvious  that,  in  any  system  which  develops  profit  by 
deducting  from  income  a  production  cost  composed  of 


'■*                                               MATEIRIAI-    JOURNAL 

Used  on  Ctassfficat-c^ 

SL^-M^  WmM  .»  IM  P*c*  U               *&  •.• 

MATERIAL 

ISSUED 

pi-a«T 

Pnt.            1     Ou«>? 

Prtc 

0— «7 

Pncc 

1J«~^ 

p™.             Q-uar 

Plies 

«—«W             »*• 

i 

1 

f 

I 

i                             1 

1 

1 

i 

1 

•                             \ 

1 

1 

•                             \ 

1 

' 

f 

i 

1 

1 

'                                                                i 

I 

1 

1 

1                            i 

MATERIAL     IN     GOODS    SHIPPED                                                                                                   | 

1 

1 

1 

] 

1 

1 

Figure  30. — material  journal 


parts  of  many  expenditures,  the  essential  necessity  is  to 
deduct  in  costs  no  more  nor  less  than  expended  or  to  take 
from  income  every  dollar  of  expenditure,  thus  leaving 
the  margin  of  profit. 

If  costs  are  kept  by  order  number  and  the  finished 
products  mentioned  at  the  various  producing  costs  just 


COSTING  OF  MATERIAL  107 

as  stock  records  of  varying  priced  raw  material,  this 
problem  is  not  difficult.  For  it  is  only  a  matter  of  deduct- 
ing the  average  cost  as  the  product  is  shipped. 

But  if  the  order  system  is  not  used  and  it  is  desired  to 
approach  its  accuracy  in  the  matter  of  accounting  for 
material  in  costs,  a  material  journal  may  be  used  such  as 
indicated  in  Figure  30.  This  form  was  developed  for  a 
manufacturer  using  circles  of  brass  and  copper  of  vari- 
ous sizes.  As  these  circles  were  issued  to  manufacture 
they  were  posted  with  their  price  to  the  journal.  As  the 
articles  were  shipped  the  cost  was  figured  less  the  ma- 
terial and  this  factor  was  added  from  the  material  jour- 
nal on  the  sheet  indicated  by  the  size  of  the  circle  used. 

This  concludes  the  discussion  on  material  costing,  the 
object  of  which  has  been  to  present  the  essential  require- 
ments, the  means  of  meeting  them,  and  then  to  consider 
certain  complicated  phases  of  the  problem  with  sugges 
tions  as  to  methods  of  successful  solution. 


CHAPTER  VI 


THE  COSTING  OP  LABOR 


Time  is  the  measure  of  business  as  money  is  of  wares. — Francis 
Bacon. 

Variability  of  Labor  Costs.— The  difficulty  and  neces- 
sity of  labor  costing  are  illustrated  by  the  statement  of 
Director  Clayton  of  the  United  States  Training  Service 
to  the  effect  that  about  three-fourths  of  the  employees 
produce  less  than  the  average  output  of  their  respective 
establishments  and  usually  fall  below  35  per  cent  of  a 
normal  day's  production. 

The  significance  of  this  statement  should  not  be  over- 
looked, for  it  indicates  the  great  range  in  individual 
capacity  existing  in  the  usual  plant  and  describes  a  con- 
dition which  obviously  complicates  the  accurate  costing 
of  labor. 

Labor  is  also  one  of  the  costliest  items  of  total  expendi- 
tures and  one  of  the  most  elusive,  and  the  foregoing 
statement  of  the  head  of  the  United  States  Training 
Service  would  certainly  bear  this  out. 

Labor  is  also  a  large  item  of  expense  which  is  variable 
and  which  requires  constant  managerial  effort  and  super- 
vision to  control  its  economy  and  even  higher  skill  to 
reduce  its  cost.  Material  is  a  definite  and  relatively 
fixed  element  in  costs  and  so  are  taxes,  insurance,  heat, 
light  and  power,  but  the  payroll  for  labor  is  a  big  expen- 
diture, usually  the  predominant  one  in  which  exists 
probably  greater  latent  possibilities  of  variation  and 

108 


COSTING  OF  LABOR 


109 


flexibility  than  in  any  other.  For  years  wages  were  con- 
fused with  labor  cost  until  the  fine  analysis  of  intelligent 
research  showed  the  fallacy  of  this  confusion  and  de- 
veloped the  true,  or  "unit,"  cost.    Unit  cost  is  the  arith- 


-PAY    CH£CE- 

Pay  Period  Endinq 

Form  No.  S  8914 
WFEK  ENP'W 

No. 

NAME 

1 

MORNINQ 

AFJERNOQN 

OVERTIME 

i 

IN 

OUT 

IN 

OUT 

IN 

OUT 

t- 

sun: 

«0N. 

rue. 

WEO 

TMU. 

FRL 

MT. 

RA 

TO 

THIS  PAY-CHECK  MUST  BE  OASHEO  BV  OWNEB. 
IF  THIS  PAY-CHECK  18  LOST  THE  CHIEr  TiME-KEEPEB 
SHOULD  BE  NOTIFIED  IMMEDIATELY,  AND  IF  IT  MAS  NOT 
BEEN  CASHED  PR"OB  TO  THE  NOTIFICATION.  PAYMENT  WILt 
BE  STOPPED  AND  A  NEW  CHECK  ISSUED  TO  THE  LOSER. 

The  Company  will  not  be  responsible  fob  The 
coss  of  pay  due  to  the  cashing  of  this  PAY^JHECK 
when  phesenteo  by  the  wrong  party. 


THIS  SIDE  OUT 


No. 

NAME 


PftM  o»  ttotrntnenit  Thao  RnorfflBf  Co.  ol  N.  Yi 


Figure  31. — front  and  back  of  clock  card 


metic  relation  between  wages  and  output  and  cannot  be 
computed  without  both. 

Labor  costing,  therefore,  is  devoted  to  the  determina- 
tion of  unit  costs  as  far  as  productive  labor  is  concerned, 
and  to  the  classification  of  the  expense  represented  by 
nonproductive  labor.  It  is  a  phase  of  costing  etf  ort  which 


110  ESSENTIALS  OF  INDUSTRIAL  COSTING 

deals  with  the  biggest  side  of  all  industry — the  human 
— and,  therefore,  requires  qualities  of  corresponding  big- 
ness in  its  application. 

Timekeeping.— The  introduction  of  a  timekeeping 
system  is  one  of  the  most  delicate  industrial  ventures 
which  may  be  imagined.  The  reason  for  this  is  contained 
in  the  instinctive  attitude  of  resentment  which  seems  to 
possess  many  individuals  when  called  upon  to  account 


Date. 
Pay  Roll  Department: 

Please  enter  on  Pay  Roll  No.. 
Name -. 


this  operative  has  been  employed  as. 


in  Dept at  rate  ol ^per  hour. 

Signed 


Employment  DepL 


Figure  32. — memorandum  authorizing  entrance  of  new  employee  on 

PAYROLL 


for  their  activity.  It  is  a  brother  to  the  distrust  which 
first  fastened  upon  time  study,  a  much  more  ambitious, 
scientific,  and  analytical  effort  than  cost  recording,  but 
it  is  bred  of  the  same  blood  and  should  be  met  with  the 
same  policy,  namely,  absolute  frankness. 

Anything  which  contributes  to  the  world's  good  is 
desirable ;  he  who  can  make  two  blades  grow  where  one 
did  before  is  a  benefactor,  and  cost  recording  has  this 
aim  fundamentally.  It  is  not  directed  at  bigger  profits 
for  capital  alone^  but  also  to  greater  service  by  estab- 


COSTING  OF  LABOR  111 

lishing  definite  knowledge  of  the  financial  nature  of  the 
physical  necessaries  of  life.  If  this  motive  can  be  made 
plain,  installation  of  timekeeping  will  be  simple.  There 
should  be  no  misunderstanding  if  honest  motives  actuate 
both  the  employee  and  the  company  and  if  no  ulterior 
or  unjust  end  is  being  furthered  or  protected  by  either. 
This  chapter  has  been  prefaced  with  the  foregoing 
commentary  because  accurate  labor  costing  cannot  be 
done  without  time  clocks  and  the  cooperation  of  every 


QUIT  SLIP 

Employment  Department: 

Plea.se  be  advised  that  No. 

Name                                                                            Hmployed  In   Dept. 

hn<;  Quit    <^ff<>ctiv<^ 

lO 

for  reji«nn  of 

Supt. 

Figure  33. — quit  slip 

employee  in  the  inquiry  which  the  time  report  represents. 
Many  manufacturers  are  constrained  from  accumulating 
dependable  costs  because  of  the  hostile  attitude  of  their 
labor,  and  costing  as  a  remedy  for  this  madness  is  viewed 
suspiciously  as  a  "hair  of  the  dog  that  bit  them." 

Payroll.— Labor  costing  is  the  detailed  accounting  of 
every  dollar  expended  in  the  wage  fund  and  that  includes 
office  and  administrative  salaries.  It  requires  first,  an 
authentic  periodical  record  of  what  this  fund  consists, 
which  is  known  as  the  payroll.    In  small  plants  with  few 


112  ESSENTIALS  OP  INDUSTRIAL  COSTING 

employees  the  superintendent  can  compute  the  payroll 
from  the  memory  of  his  morning  and  evening  nods  and 
greetings,  but  this  condition  is  rare  to  vanishing  and  is 
gone  for  the  purpose  of  this  treatise  to  the  dead  limbo 
of  the  past. 

In  modern  plants  with  thousands  of  employees  some 
form  of  mechanical  register  of  attendance  is  indispen- 
sable, and  this  has  been  supplied  by  the  check  or  clock 
system.    The  check  system  is  antiquated  and  its  record 


RATE  CHANGE  REQUEST 

Date 

Name                                                                       No. 

Has    requested    an    increase  in  wages  which  I  d^oot^rMommend  *°'"  *••€ 

following  reasons: 

Foremao 

Approved 

Rating                                   Present  Rate 

Supt. 

Granted                                 Changed  Rate 

Approved 

Not  Qraoted 

Mgr. 

Employment  Dept. 

FiGUKE    34. — RATE    CHANGE    REQUEST 

of  doubtful  legality.  The  only  quality  of  this  method 
deserving  attention  is  the  number  which  it  attaches  to 
each  employee.  This  number  system  sacrifices  per- 
sonality to  some  extent  in  submerging  the  name,  but 
results  in  a  vast  lightening  of  clerical  detail.  The  in- 
and-out  clock  system  is  the  only  dependable  and  cer- 
tainly the  most  satisfactory  method  of  recording  attend- 
ance. Special  clocks  for  the  purpose  have  been  developed 
which  are  foolproof  and  automatic  and  are  controlled 
electrically  from  masters  and  are  indisputably  correct. 
The  usual  type  of  clock  uses  a  card,  such  as  shown  in 


COSTING  OF  LABOR  ll3 

Figure  31.  This  card  shows  th-^  employee's  number  and 
name  and  registers  the  time  daily  by  morning  and  after- 
noon and  overtime,  that  is,  time  beyond  the  regular 
hours.  This  card  also  has  a  receipt  which  is  detached 
and  held  by  the  employee  and  then  presented  for  pay- 
ment, duly  signed. 

Provision  for  these  time  cards  is  made  by  the  payroll 
department  upon  receipt  of  the  advice  of  the  employ- 
ment department.  When  an  addition  is  made  to  the 
number  of  employees  a  memorandum,  illustrated  in 
Figure  32,  is  sent  to  the  payroll  department  and  when 
an  employee  quits  or  is  discharged  the  time  card  is  drawn 
by  the  employment  department  and  the  card,  attached 
to  a  memorandum  (Figure  33),  is  returned  to  the  pay- 
roll department.  Changes  in  the  base  hourly  rate  should 
be  made  intelligently  and  in  many  companies  authority 
in  this  matter  is  taken  from  the  foreman  and  vested  in 
a  committee  or  some  higher  plant  executive.  Advice  of 
whatever  action  is  taken  is  sent  to  the  payroll  depart- 
ment on  a  form  similar  to  that  shown  in  Figure  34. 

The  clock  cards  are  extended,  that  is,  the  hours  spent 
each  day  are  marked  for  the  day  in  the  margin  provided 
on  the  card  and  then  totalled  for  the  week.  In  day  rates 
these  hours  are  paid  at  a  fixed  rate  and  the  time  is  ex- 
tended by  this  rate  and  entered  on  the  payroll.  In  the 
case  of  piece  work,  bonuses,  or  other  differential  wage 
systems  of  payment,  the  hours  on  this  card  are  used  as 
the  check  against  other  time  cards  or  as  the  basis  of 
calculation  of  the  wage  payment  and,  therefore,  in  any 
case,  are  the  fundamental  facts  of  labor  costing. 

Payroll  forms  vary  largely  with  particular  conditions, 
but  Figure  35  is  a  representative  sheet  which  has  been 
designed  to  work  with  an  addressing  machine  and  thus 
save  labor  in  printing  the  names.    It  is  divided  depart- 


f2 


114 


COSTING  OF  LABOR  115 

mentally  and  each  week  a  new  fly  sheet  is  used  so  that 
the  same  name  sheet  may  be  used  with  such  additions  or 
withdrawals  as  may  occur.  Income  tax  legislation  has 
required  the  individual  record  of  wage  payments,  and  the 
forms  shown  in  Figures  36A,  B  and  C  were  devised  for 
this  purpose.  By  a  simple  adaption  they  may  be  used 
for  the  departmental  records.  Figure  36A  is  the  sheet 
maintained  for  each  individual  and  it  will  be  observed  it 
provides  for  52  weeks,  or  a  year,  as  it  is  printed  on  both 
sides.  Figure  36B  is  kept  departmentally  and  shows  the 
wage  of  the  employees  in  each  department.  The  margin 
provides  for  names  and  the  sheet  is  made  out  weekly. 
Figure  36C  is  a  summary  record  made  weekly  from  the 
totals  of  the  departmental  wage  records,  as  shown  in 
Figure  36B.  By  means  of  this  sheet  an  individual  record 
may  be  kept  for  the  year  and  by  use  of  the  margin  may 
be  converted  into  a  weekly  departmental  record  and  a 
further  summary  of  the  same. 

The  location  of  an  employee  in  a  particular  department 
is  denoted  by  his  clock  number.  To  effect  this  each  de- 
partment is  given  a.  range  of  clock  numbers  and  all  em- 
ployees in  that  department  have  a  clock  number  within 
that  range.    For  instance: 

Department  Number  Clock  Number 

17 100-175 

18 176-280 

19 281-350 

20 351-425 

21 426-525 

etc. 

So  far  this  discussion  covers  the  basic  or  proof  record 
of  the  total  time  and  total  wages  known  as  the  payroll, 
but  this  serves  only  as  a  check  upon  the  finer  time  dis- 
tribution representing  the  varied  activity  of  every 
employee.    This  information  is  obtained  from  the  coUec- 


EMPLOYEE  WAGE   RECORD 

OePARTMCNT      ,                                                                                                                                NUMflCR 

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118 


COSTING  OF  LABOR  119 

tion  of  data  showing  the  time  spent  upon  such  divisions 
of  productive  and  nonproductive  labor  as  may  be  re- 
quired for  the  system.  It  effects  this  collection  through 
the  medium  of  a  cost  card.  The  cost  card  shows  the  time 
spent  on  every  order  number  or  process,  the  operation 
done,  the  quality  of  work  done,  the  identity  of  the 
work,  etc. 

Cost  Cards.— The  form  of  the  cost  card  has  almost 
infinite  variation  and  is  governed  by  the  requirements 
peculiar  to  the  industry  or  the  manner  in  which  it  is 
conducted.  For  instance,  in  some  cases  an  employee  may 
do  the  same  process  or  work  on  the  same  order  day  in 
and  day  out ;  in  others  an  employee  may  be  engaged  on 
as  many  as  15  different  orders  or  processes  in  a  day. 
The  form  of  the  time  card  is  also  effected  by  the  kind  of 
wage  system  in  use,  and  also  by  the  method  of  time  collec- 
tion whether  by  the  employees  or  special  clerks  or  by 
pencil  or  by  cost  clock.  These  factors  govern  the  design 
of  the  card,  but  certain  essential  information  must  be 
secured  by  it  which  is  summarized  as  follows : 

Date 

Time  of  beginning  job 

Time  of  ending  job  ' 

Order  number  or  process 

Article  number  or  other  description 

Quantity  done 

Quantity  good 

Piece  rate  or  bonus  data  sufficient  to 

calculate  the  wage 

An  important  consideration  in  the  collection  of  cost 
cards  described  is  in  what  manner  the  clerical  labor  rep- 
resented shall  be  done.  There  is  a  wide  field  for  choice 
here,  for  the  man  may  keep  his  own  time,  or  his  foreman 
may,  or  a  special  cost  clerk  may,  and  this  may  be  done  in 
written  record,  or  the  time  may  be  registered  by  cost 
clocks.    Decision  as  to  which  method  is  to  be  used  is 


120  ESSENTIALS  OF  INDUSTRIAL  COSTING 

again  a  balanced  judgment  in  which  expense  or  cost  is 
weighed  against  accuracy.  It  may  be  said  certainly  that 
the  least  accurate  way  is  for  the  man  to  keep  his  own 
time  and  the  most  accurate  is  by  use  of  a  special  clerk 
with  a  cost  clock.  It  is  simply  a  matter  of  deciding 
whether  costs  are  to  be  80  per  cent  or  99  per  cent  correct 
and  this  statement  of  the  case  is  in  no  way  exaggerated. 
In  the  matter  of  economy  it  is  verj^  doubtful  if  the  man 
or  foreman  keeping  time  is  cheaper  than  the  use  of  a 
special  clerk,  although  because  the  expense  of  the  former 
method  is  not  always  apparent  it  is  often  considered 
cheaper. 

If  employees  spend  their  time  productively  and  the 
foreman  spends  his  on  supervision,  the  use  of  a  cost  clerk 
is  an  economy,  for  no  greater  economy  can  be  attained 
than  by  "each  man  to  his  function."  A  clerk  can  handle 
from  30  to  100  men,  dependent  upon  the  number  of  jobs 
and  the  detail  required,  and  it  is  recommended  that  a 
clerk  be  used  whenever  possible. 

A  cost  clock  is  also  a  desirable  appurtenance  and  re- 
sults in  cleaner  cut  records  and  further  because  of  the 
ingenuity  of  some  of  the  clock  systems  the  calculation  of 
unit  costs  is  greatly  facilitated.  Apropos  of  this  matter 
of  calculation  it  is  well  to  say  that  the  detail  of  checking 
and  extending  daily  cost  cards  and  registering  their 
charges  composes  the  labor  which  has  affrighted  many 
executives  and  it  is  truly  appalling  to  think  of  the  clerical 
labor  involved  in  distributing  the  labor  charges  for  5,000 
men  engaged  on  five  to  ten  jobs  daily.  Much  of  this 
undeniable  burden  has  been  facilitated  by  mechanical 
devices.  As  a  splendid  example  the  tabulating  machine 
may  be  mentioned.  By  the  use  of  this  machine  great 
masses  of  statistical  data  are  handled  almost  automati- 
cally, and  with  further  possibilities  of  classifying  and 


COSTING  OF  LABOR 


121 


reclassifying  from  the  same  records.  The  card  used 
with  this  machine  is  shown  in  Figures  37  and  38.  The 
one  card  is  (Figure  37)  master  card  for  all  total  daily- 
time  and  the  other  card  is  a  job  card  which  is  proved 
against  the  master  and  then  distributed. 


/Employee                                                           „„ 
/    Name                                                                     No- 

1 
'J 

clock  STAMP 

HOURS 

RATE 

AMOUNT 

ORDER  NO. 

OPER. 

PIECES 

Date 

F 

EmpIoyettB 

Uouis 

Amount 

S 

>■ 

1 

2 

3 

1  1  1 
222 
333 

1  1 

22 

33 

1 
2 
3 

1   1 

22 

33 

1  1 
22 

33 

p  w 
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F 

00 

S 

CO 

F 

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5 
6 

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555 
666 

44 
55 
66 

4 
5 
6 

44 
55 
66 

44 

55 
66 

It  m 

S 

F 

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T 

7 

8 

9 

777 
88  8 
999 

7/ 
88 
99 

/ 
8 
9 

/  / 
88 
99 

88 
99 

1 

2 
3 

s 

DEPT.                      1  TOTAL 

D.W.     P.W. 

SHIFT  1-2-3                                             horeman 

0  0  0 

2  2.2 

3  3:3 


4  4;4 

5  5;5 

6  e'e 

7  7;7 

8  sis 

9  g!9 


0  0:0  0  0 
'  1  lit  1  1 

2  2;2  2  2 

3  313  3  3 
'4  4:4  4  4 

5  5J5  5  5 

6  6:6  6  6 
, 7  7:7  7  7 

8  e:8  8  8 

9  919  9  9 


X 

0,6  0  0 

1:111 

2:222 

Sis  3  3 
4l4  4  4 


5  5  0 

3  6  6 

7  7  7 

8  6  8 

9  9  9 


0(0  0  0 
1  jl  1  1 
212  2  2 
3)3  3  3 

4  4  4 

5  5  5 

6  6  6 

7  7  7 

8  8  8 

9  9  9 


Figures  37  and  38. — time  cards  used  with  Hollerith  tabulating  machine 

Classification  of  Labor.— The  actual  detail  of  labor 
classification  and  what  division  and  refinement  shall  be 
made  in  the  cost  collection  are  contingent  on  the  condi- 
tions of  the  given  industry.  The  distinction  between  pro- 
ductive and  nonproductive  as  direct  and  indirect  labor  is 
arbitrary  in  the  extreme.  In  general,  productive  labor  is 
that  which  can  be  attached  directly  to  the  cost  of  the 
goods,  while  nonproductive  labor  is  that  which  makes  its 
separate  identity  by  order  number  and  process  impracti- 


122  ESSENTIALS  OF  INDUSTRIAL  COSTING 

cable.  The  guiding  effort  should  be  to  include  as  much 
of  the  wage  fund  as  possible  in  productive  labor  and  that 
means  to  include  every  dollar  consistent  with  commercial 
limits.  This  latter  restraint  varies  with  the  individual 
executive — some  are  willing  to  refine  closely,  others  are 
satisfied  mth  approximations. 

The  ratio  of  productive  to  nonproductive  labor  ranges 
from  5  to  1  to  10  to  1  and  in  some  cases  the  ratio  is  greater. 
Of  course,  there  are  industries  in  which  the  element  of 
productive  labor  is  so  dispersed  over  many  machines 
and  the  amount  of  expense  or  overhead  is  proportion- 
ately so  much  greater  than  the  labor  that  effort  to  dis- 
tribute the  productive  labor  closely  is  relaxed.  The 
reason  in  a  case  of  this  kind  is  that  the  overhead  applied 
in  such  high  rate  to  labor,  which  itself  may  be  of  doubt- 
ful accuracy  in  distribution,  magnifies  any  errors  which 
may  exist  in  the  Productive  Labor  Distribution.  This 
situation  is  met  by  the  use  of  machine  hour  rates  which 
include  the  labor  as  a  form  of  expense.  As  a  specific 
example  let  us  assume  a  tender  operating  eight  different 
looms  engaged  on  four  different  orders.  His  attention 
or  labor  is  divided  irregularly  among  the  looms,  some  of 
his  time  is  spent  on  routine  details,  more,  and  probably 
the  greater  portion  of  his  time  to  caring  for  machine 
stoppages  from  broken  threads  or  some  similar  operat- 
ing exigency.  The  report  of  his  time  by  order  numbers 
might  be  correct,  but  the  chances  are  against  it  and  so 
the  machine  hour  rate  is  used.  That  is,  the  order  is 
charged  ^\ith  a  certain  number  of  loom  hours  in  the  cost 
of  which  is  included  the  labor  of  tending  as  an  item  of 
expense.  This  example  presupposes,  of  course,  that  the 
operator  is  engaged  on  cloth  of  similar  w^eaving  require- 
ments and  not  with  fancies  on  one  loom  and  plain  fabrics 
on  another.    But  w^hile  this  condition  is  often  encoun- 


COSTING  OF  LABOR  123 

tered,  by  and  large  productive  labor  is  a  big  factor  in 
proportion  to  expense  and  its  correct  distribution  is  of 
vital  importance.  In  most  manufacture  the  classifica- 
tion of  labor,  the  designation  of  operations,  and  the 
accumulation  of  unit  labor  costs  are  functions  only  of 
the  clerical  machinery  necessary  to  collect  them.  The 
order  or  process  is  clearly  defined,  a  suitable  time  card 
easily  designed,  and  the  routine  of  labor  costing  not  dif- 
ficult to  establish. 

Difficulties  in  Costing  Labor.— Occasionally  baffling 
peculiarities  in  particular  circumstances  will  arise.  As 
an  instance,  I  recall  a  window  screen  plant  producing  on 
a  basis  of  many  small  residence  orders.  The  window 
openings  varied  enormously  in  number,  area,  and  dimen- 
sions. If  the  system  could  have  used  the  order  basis  of 
collection,  costs  could  have  been  accumulated  without 
trouble.  Unfortunately,  however,  the  small  orders  meant 
that  many  operatives  handled  40  orders  per  day  and  the 
labor  of  timekeeping  was  too  onerous  to  permit  of  cost- 
ing on  the  order  basis.  The  operation  or  process  basis 
was  the  alternative,  but  here  the  problem  was  the  utter 
lack  of  resemblance  or  identity  of  the  individual  screens 
which  were  of  all  areas  and  of  different  proportions  in 
dimensions.  Obviously  this  prevented  the  use  of  the 
screen,  the  natural  unit,  as  the  basis  of  costing.  So  that 
here  was  a  problem  in  labor  costing  of  establishing  a 
unit  of  manufacture  wherewith  to  record  the  labor. 
Study  of  the  manufacturing  process  revealed  the  fact 
that  practically  all  operations  were  functions  of  the 
linear  feet  in  the  frame  of  the  screen  or  perimeter  of  the 
opening.  This  suggested,  of  course,  the  use  of  the  screen 
foot  as  the  costing  unit.  With  the  exception  of  two  small 
operations,  such  as  attaching  hardware  which  could  be 
accurately  costed  on  the  individual  screen  basis,   the 


124  ESSENTIALS  OF  INDUSTRIAL  COSTING 


SHOP     ORDER 

DATE  ORDER  ORDER  NO. 


DATE  REQUIRED  LABOR  ACCOUNT  NO. 


DATE  COMPLETED  MATERIAL  ACCOUNT  NO. 


PLEASE  DO  THE  FOLLOWING  WORK  AND  CHARGE  AS  INSTRUCTED  BELOW 


Manager 


Charge  all  LABOR  on  individual  time  card  showing  both  this  Order  No.  and  this  LABOR  Acct.  No. 
Charge  all  MATERIAL  on  supply  requisition  showing  both  this  Order  No.  and  this 
Material  Account  No. 


Figure  39A. — special  repair  or  maintenance  order,  front 

screen  foot  was  used  and  dependable  unit  operation  costs 
developed  from  which  it  was  easy  to  compute  the  indi- 
vidual order  costs  in  the  office. 

Nonproductive  Labor.— Nonproductive,  or  indirect, 
labor  is  always  found  in  one  form  or  another.  Yard 
labor,  trucking  labor,  storeroom  labor,  millwright  and 
repair,  machine-shop  labor,  foremen  supervision,  and 
sometimes  inspection,  are  representative  of  that  part  of 
the  factory  payroll  which  cannot  readily,  and,  in  some 
cases,  cannot  possibly,  be  attached  directly  to  the  cost  of 
the  product.     Accordingly  this  labor  is  collected  and 


COSTING  OF  LABOR 


125 


COST    RECORD 

Date 

Dept. 

Man  No. 

Rate 

Am'nt. 

Expense 

Date 

Dcpt. 

Man  No 

Rate 

Am'nt. 

Expense 

MA  TERIA.  L                                        \ 

Date 

Amount 

Date 

Amount 

Date 

Amoun 

RECAPITULATION 

Labor 

Exp. 

Mal'l. 

Total 

FiGlTRE  39B. — SPECIAL  REPAIR  OR  MAINTENANCE  ORDER,  BACK 


charged  into  expense  and  applied  in  the  form  of  a  per- 
centage on  the  productive  labor  composing  the  cost  of 
the  product,  or  is  used  with  the  productive  labor  and 
other  expense  to  determine  a  machine  hour  rate.  The 
timekeeping  of  nonproductive  labor  is  relatively  simple, 
as  it  is  work  which  in  the  first  place  is  well  identified. 
This  is  accounted  for  by  the  fact  that  nonproductive 
labor  generally  receives  close  analysis  and  scrutiny  on 
the  part  of  executives  and  only  that  portion  which  is 
indispensably  necessary  is  permitted  to  exist.  This  atti- 
tude has  resulted  in  accurate  designation  of  nonproduc- 


126  ESSENTIALS  OF  INDUSTRIAL  COSTING 

tive  labor,  by  means  of  code  numbers,  or  standing  ac- 
count or  order  numbers  to  which  this  labor  is  charged. 
Details  of  these  will  be  considered  at  length  in  the  chap- 
ter on  expense.  Some  of  the  work,  however,  especially 
that  done  by  the  machine  shop  and  millwrights,  has  to 
be  authorized  by  special  repair,  or  maintenance,  order, 
an  example  of  which  is  illustrated  in  Figures  39A  and 
39B. 

Inspection  Labor.— There  are  some  forms  of  labor,  such 
as  inspection,  setting-up  labor  in  machine  shops  or  press- 
rooms, and  productive  repairs  which  are  mooted  matters 
in  regard  to  their  classification  as  productive  or  non- 
productive labor.  Here  again  the  cardinal  rule  demands 
that  whatever  can  be  charged  productively  should  be,  but 
there  are  complications  in  so  doing  as  the  following  dis- 
cussion will  evidence.  Inspection  is  a  variable — it  may 
change  from  one  lot  of  the  same  product  to  another,  due 
to  uncontrollable  variations  in  the  shop.  At  one  time  it 
might  bear  heavily  on  the  product,  and  again  not.  A 
heavy  inspection  charge  might  be  made  against  a  prod- 
uct and  at  the  same  time  the  inspection  might  have  indi- 
cated and  corrected  operating  conditions  which  brought 
other  products  through  with  fewer  flaws.  In  a  word, 
the  later  product  might  benefit  by  an  inspection,  the 
charge  of  which  was  fastened  entirely  upon  a  previous 
lot.  It  is  because  of  such  variations  that  inspection  is 
generally  regarded  as  nonproductive  labor  although 
sometimes  it  is  costed  as  productive  labor  and  even  paid 
by  piece  rates.  In  plants  engaged  on  interchangeable 
parts  manufacture,  where  the  inspection  is  routine  in 
amount  and  frequency,  there  is  no  difiiculty  in  charging 
inspection  to  the  product  directly.  The  extent  of  inspec- 
tion in  a  manufacture  of  this  kind  may  be  gathered  from 
the  practice  of  a  large  gun  company  where  as  many  as 


COSTING  OF  LABOR  127 

200  inspections  are  made  on  the  parts  composing  one 
type  of  gun. 

Setting-up  Labor.— Setting-np  labor  is  a  charge  which 
usually  can  be  made  against  the  product  directly  as  far  as 
its  connection  with  the  operation  for  which  it  prepares 
is  concerned.  But  in  many  cases  the  same  setting-up 
labor  will  be  used  for  many  orders  and  then  obviously 
its  apportionment  over  them  is  so  purely  empirical  as  to 
make  the  effort  futile  and  it  is  then  regarded  as  non- 
productive labor. 

Repair  Labor. — Productive  repairs,  sometimes  known 
as  excess  labor,  defines  the  labor  expended  on  repairing 
remediable  defects  in  the  product  incurred  in  process. 
Excess  labor  is  frequently  regarded  as  nonproductive  but 
there  are  cases  where  such  disposition  would  not  result 
accurately.  Pocket  knives  are  made  with  a  bone  stag 
cover  and  sometimes  with  a  fiber  cover.  Stag  is  brittle 
while  fiber  is  not,  and  the  riveting  operation  cracks  stag 
easily  and  entails  repairs  five  to  ten  times  as  great  as 
those  developed  in  the  same  operation  on  fiber.  If  the 
entire  repair  labor  Avere  included  in  overhead,  the  levy 
on  stag  or  fiber  would  be  the  same,  a  manifest  inequity 
which  would  make  substantial  difference  in  the  actual 
costs.  In  such  a  case,  repair  labor  must  be  differentiated 
and  charged  to  the  particular  product  or  order.  The 
examples  may  serve  to  show  the  complexities  which  are 
inevitably  met  in  costing  design  and  to  which  there  is 
only  the  advice  to  charge  directly  to  product  if  practi- 
cable and  if  not,  into  overhead. 

Unit  Basis  of  Charging  Labor.— In  the  pursuit  of  the 
principle  of  charging  all  possible  labor  directly  or  pro- 
ductively, conditions  are  met  which  seem  to  preclude  so 
doing.  Many  times  workmen  will  be  engaged  on  an  oper- 
ation and  on  different  kinds  or  grades  of  product  to 


128  ESSENTIALS  OF  INDUSTRIAL  COSTING 

which  there  are  no  definite  or  reasonable  points  of  begin- 
ning and  ending  between  jobs.  In  a  case  of  this  kind 
the  unit  system  may  be  used  to  advantage.  This  unit 
system,  or  unitizing  as  it  is  called,  operates  by  determin- 
ing mtli  accuracy  the  relation  in  time  required  to  do  a 
given  operation  on  different  grades  of  the  product. 
Assume  as  example  a  case  as  follows : 


Time  Required  Per  100 

Grade 

Pounds  for  Operation 

1 

5  hours 

2 

4  hours 

3 

3  hours 

4 

6  hours 

5 

7  hours 

e  unit  relationship  would  be 

developed  as  follows : 

Grade 

Unit 

1 

1 

2 

0.80 

3 

0.60 

4 

1.2 

5 

1.4 

Production 

Equivalent  or  Unit 

Grade 

in  Pounds 

Production 

1 

13  X  1.0 

13 

2 

10  X    .80 

8 

3 

5x    .60 

3 

4 

25x1.20 

30 

5 

35  X  1.40 

49 

103  unit 
production 

Assume  the  operator  in  nine  hours  did  103  units  at  a 
day's  wage  of  $6.00.  The  cost  per  unit  w^ould  then  be 
$6.00  divided  by  103  or  $0.0583.  If  the  actual  cost  per 
pound  is  desired,  it  is  only  necessary  to  multiply  the  cost 
per  unit  by  the  unit  factor  of  the  particular  grade  desired. 
As  an  example,  assume  the  case  of  Grade  5  where  the 
unit  factor  is  1.4.  The  cost  per  actual  pound  of  that 
grade  is  $0.0583  multiplied  by  1.4,  or  $0.0817. 


COSTING  OF  LABOR  129 

The  foregoing  describes  and  illustrates  a  very  in- 
genious method  of  ascertaining  unit  labor  cost  under 
difficult  circumstances  and  the  same  principle  will  appear 
again  in  a  later  chapter  in  connection  with  the  distribu- 
tion of  expense. 

So  far  this  chapter  has  not  considered  in  detail  the 
effect  upon  timekeeping  and  costing  of  the  various  forms 
of  differential  wage  payments.  Wage  systems  are  prime 
factors  in  economy  and  in  their  application  the  immedi- 
ate economies  are  put  before  the  matter  of  convenience 
in  their  proper  costing.  So  many  volumes  have  included 
dissertations  on  the  different  kinds  of  wage  payments, 
per  se,  that  I  will  discuss  them  very  briefly  and  will 
then  concentrate  on  the  phase  of  their  operation  most 
appropriate  to  this  volume,  namely,  the  method  of  han- 
dling them  in  costs. 

Wage  Systems.— There  are  seven  prominent  methods 
of  wage  payment,  of  which  there  are  variants  negligible 
from  the  point  of  principle,  so  that  the  essential  methods 
may  be  stated  as  follows : 

1.  Day  Rate 

2.  Piece  Rate 

3.  Taylor  Differential  Piece  Rate 

4.  Halsey  Premium 

5.  Rowan  Premium 

6.  Gantt  Task  and  Bonus 

7.  Emerson  Bonus 

1.  Dat/  Rate. — The  day-rate  system  is  the  traditional 
basis  of  payment  based  on  the  time  put  in  and  a  definite 
hourly  rate.  It  is  independent  of  production  and  cannot 
readily  be  made  equivalent,  although  it  is  supposed  to 
approximate  the  value  of  productive  ability  by  increas- 
ing the  hourly  rate.  It  is,  however,  far  too  inflexible  for 
any  such  purpose  and  is  an  exceedingly  primitive  basis 
of  exchange.    The  day  rate  is  probably  the  most  unsatis- 


130  ESSENTIALS  OF  INDUSTRIAL  COSTING 

factory  system  of  wage  payment  from  the  point  of  cost- 
ing, because  of  the  admitted  absence  of  any  definite  rela- 
tion of  wage  and  production.  As  far  as  the  clerical  means 
of  collection  go  it  is  simple,  but  the  great  fluctuation  in 
unit  costs  in  which  it  results  justify  the  criticism  made. 
The  day-rate  system  operates  with  the  time  card  illus- 
trated in  Figure  40,  varying  chiefly  with  the  kind  of  cost 
clock  used. 


6«07<T 

DATE 

ELAPSED 
TIME 

MACH.  No.    .  _ 

UAN'S  No 

_l 

riNJSH 

HOUR 

TENTH 

'^^^^^,1 

ORDER  NO. 

•TART 

OPERATION 

PART  NO. 

FINISH 

START 

CHARGE  |g^?V 

FINISH 

PART  No. 

START 

PIECES 

«>»  X  mil 

FINISH 

START 

.,..,„T 

RATE 

AMOUNT       1 

PIECE  RATE 

DAY  WORK 

DOLLARS 

CENTS 

OYCiTnl 

■•■■  JuuMir 

lial 

Figure  40.— specimen  cabd  used  with  day  eatb  or  piece  bate 


2.  Piece  Rate.— The  piece-rate  plan  is  a  basis  of  pay- 
ment by  which  the  operator  receives  a  wage  directly  con- 
ditional on  output,  in  fact,  it  might  be  distinguished  from 
day  rate  as  a  form  of  pajTuent  wherein  units  of  produc- 
tion instead  of  units  of  time  are  multiplied  by  money. 
Piece  rate  is  perhaps  the  most  accurate  basis  of  labor 
costing  that  may  be  attained,  for  by  it  the  operator 
receives  as  wage  what  is  the  actual  cost.  It  is  also  one 
of  the  simplest  in  timekeeping  because  in  most  cases 
it  is  not  necessary  to  record  the  elapsed  time  on  each 


BLADE  ORDER 

MACHINE  GROUND 

Blade  No.  Quantity 


Operation  No.  63— BU.'^DE  SWEDGINa— M.  C. 

Man  No. 


JrtJer  No. 


Blade  No. 


Quantity 


Operation  No.  62— BL.ADE  MACHINE  GRIND— M.  G. 

Man  No. 
)rd<T  No.  BlAc  No.  Quantity 


JrdcT  No. 


Operation  No.  61— BLADE  BACK  GRIND— M.  G. 

Man  No. 
Blade  No.  Quantity 


Order  No. 


Order  Na 


Operation  No.  56— BLADE  STRAIGHTENED— M.  C. 

Man  No. 
Order  No.  Blade  No.  Quantity 


Operation  No.  60— BLADE  TEST— M.  C 

Man  No. 
Blade  No. 


Quantity 


Operation  No.  59-BLADE  HARDEN  and  TEMPER— II.  G. 

Man  No. 
Order  No.  Blade  No.  Quantity 


Operation  No.  53- BLADE  TANG  GRIND— M.  G^^ 

Man  No. 
Blade  No.  Quantity 


Operation  No.  57— BLADE  LEVEU-M.  G. 

Man  No. 


Blade  No. 


Quantity 


Operation  No.  55— BLADE  NAIL  NICK— M.  G. 

Man  No. 
Blade  No.  Quantity 


Operation  No.  S4— BLADE  TRIMMING— M.  G. 

Man  No. 
Blade  No.  Quantity 


Order  No. 


Operation  No.  53— BLADE  ANNEALING— M.  Q. 

Man  No. 
Blade  No.  Quantity 


Operation  No.  52— BLADE  FORGING— M.  G. 
Man  No. 
Blade  No.  Quantity 


Operation  No.  51— BLADE  BLANKING— M.  G. 

Man  No. 
Blade  No.  Quantity 


Operation  No.  50— BLADE  SHEARING— M.  C. 

Man  No. 
Blade  No.  Quantity 


Figure  41. — coupon  woek  ticket  used  in  connection  with  piece  batjj 

131 


132  ESSENTIALS  OF  INDUSTRIAL  COSTING 

job.  A  coupon  system  is  used  effectively  under  the  piece- 
rate  plan  such  as  shown  in  Figure  41.  The  assertion  as 
to  the  accuracy  of  piece  rate  may  appear  sweeping  in 
view  of  the  qualifications  which  must  be  mentioned. 
Piece  rate  was  the  first  step  from  day  rate  and  the  man- 
ner of  its  introduction  and  operation  often  has  been 
hedged  about  with  stupidity  which  vitiated  accuracy. 
Piece  rates  were  set  haphazardly,  cut  unhesitatingly,  and 
often  bore  no  equitable  relation  in  basic  earning  capacity 
one  with  the  other.  In  a  certain  cutlerj^  plant  a  prevail- 
ing custom  for  years  had  been  to  scale  the  piece  prices  on 
the  various  operations  according  to  the  market  prices  of 
the  knives.  The  cutlery  industry,  like  many  businesses, 
had  patterns  in  the  line  that  sold  at  small  margins,  even 
none,  and  others  mth  big  margins. 

The  cheaper  knives  in  selling  price  were  manufactured 
at  piece  prices  less  than  the  piece  price  of  knives  higher 
in  sales  value  despite  the  fact  that  the  actual  work  in- 
volved was  equivalent. 

This  method  not  only  resulted  in  an  unsettled  labor 
situation,  but  was  absurd  as  the  basis  of  costing  because 
the  time  actually  spent  on  operations  was  entirely  con- 
trary to  the  piece  price,  so  that  the  apparent  cost  con- 
structed on  the  piece  price  was  untrue.  Piece  prices 
should  be  investigated  therefore  to  determine  their  rela- 
tive earning  equities  and,  in  this  w^ay,  their  costing  ac- 
curacy. Frequently,  in  the  use  of  piece  prices,  the  start- 
ing of  new  men  in  a  department  must  be  done  on  day 
rate  until  the  men  acquire  sufficient  skill  to  earn  on 
piece  rate.  Obviously  this  cost  of  training  is  a  charge 
general  to  the  department  and  it  is  good  costing  practice 
to  carry  the  difference  between  this  wage  and  their  piece- 
rate  earnings  as  an  overhead  item  for  apprenticeship  or 
learners. 


COSTING  OF  LABOR 


133 


Piece  rates  to-day  are  set  by  time  study  and  are  becom- 
ing increasingly  accurate  and  dependable  and  hence  in- 
creasingly serviceable  in  costing. 

3.  Differential  Piece  Rate. — The  differential  piece  rate 
is  the  creation  of  Frederick  W.  Taylor,  the  acknowledged 


/ 

1 

19  20 
2I22 

OP 

"<'■" 

Pntv   FIN 

F1M     TODAY 

CASTINGS 

(/ ,„ 

^     1      «, 

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0  0 

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o"o"'o|o"o''olo'£rd|      1 

1       ORDER  AND  ITEM       .tio.pJECtS.                                                                                                ;                               :            ; 

I  1                                i               i 

II  i 

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tw 

B                           i            : 

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1                                   «i        1 

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TwMi  Ur*.     [•r«tD-      Hkcb.       HacblM. 

Mui'a               Total 

00  NOT  PUNCH       ' 
AT  THIS  END 

INSTRUCTIONS 

PIECE  WORK 

PREMIUM    WORK 

OPERATIONS 

toot 

CUT 

™.. 

•  PEED 

MION   •»■ 

A;:.";o"„ 

6  ;;".•„;,':',•;-%" 

>•  "illi"l' 

MuiT    MOT    CICICO 

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......TO. 

P«IP*t*TiQN 





tlNE 

":;,cV" 

TOTAL  ro»  HO 
OP   PC».    Fl>  I 
C  TIHE  TA>ni 



"l-E" 

0  NO.    Nouns 



PfM  Meet 

OHE.»«LP    0 

^Oaii*  0»liB  tost 


Figure  42. — front  and  back  of  differential  piece  work  card  used  in 

connection  with  the  hollerith  tabulating  machine 

at  link  belt  company,  philadelphia 


pioneer  in  scientific  management,  and  was  designed  to 
reward  the  specially  productive  piece-work  operatives 
beyond  the  earnings  made  at  the  fixed  rate.  It  served  to 
maintain  production  at  the  highest  possible  level  for  the 
unusually  skilled  and  also  provided  a  superincentive  for 
those  less  skilled  to  improve.     By  its  arrangement  a 


134  ESSENTIALS  OF  INDUSTRIAL  COSTING 

standard  was  fixed  for  a  product  up  to  which  payment 
was  made  at  the  basic  piece  rate  and  beyond  which  pay- 
ment was  made  at  a  higher  piece  rate. 

The  differential  piece-rate  system  is  fitted  admirably 
to  a  manufacture  in  which  there  is  a  continuous  flow  of 
the  same  article  and  in  which  there  are  few,  if  any, 
changes  within  the  payroll  period.  When,  however,  there 
is  frequent  change  of  article,  it  is  necessary  to  keep 
elapsed  time  on  each  job  (see  Figure  42)  and  to  calcu- 
late the  rate  or  production  to  determine  whether  the  dif- 
ferential rate  applies  to  the  different  jobs.  Under  such 
conditions  the  computation  is  equally  as  involved  as  with 
any  wage  system,  and  the  relative  simplicity  of  compre- 
hension of  this  system  to  the  operator  is  largely  lost  to 
the  operative. 

In  costing  the  question  presented  is  how  the  differen- 
tial is  to  be  treated.  Obviously  to  adhere  to  the  basic 
principle  it  should  be  charged  to  the  order  or  process. 
At  once,  however,  the  advantage  of  a  flat  piece  rate  in 
fixing  the  unit  cost  disappears,  for  the  extent  of  the  dif- 
ferential is  an  uncertainty  on  every  job  and  so  the  unit 
cost  is  variable.  On  the  strict  order  basis  this  is  not 
disadvantageous  but  on  the  operation  basis  it  is.  To 
obviate  this  difficulty  the  differential  may  be  carried  in 
the  overhead  of  the  department  in  which  it  is  earned  and 
so  it  may  be  applied  uniformly  on  the  production  cost 
represented  by  the  piece  price.  There  is  no  objection  to 
this  method  nor  does  it  impair  accuracy,  because  if  the 
piece  prices  are  equitably  established,  the  differential 
should  be  uniform.  In  fact,  considering  the  range  in 
personal  efficiency  of  different  operatives,  it  equates  the 
cost  and  so  prevents  the  possibility  of  two  identical  jobs 
done  by  two  operatives  reflecting  two  different  labor 
costs. 


COSTING  OF  LABOR 


135 


4.  Halsey  Premium  Plan. — The  Halsey  Premium  Plan 
is  a  differential  system  of  payment  which  has  to  its 
decided  credit  simplicity  in  calculation  and  comprehen- 
sion to  the  operative.  The  premium  system  works  by 
establishing  a  time  standard  for  a  job  and  granting  the 
operative  a  percentage  of  the  time  by  which  the  standard 
is  reduced.  The  percentage  usually  given  is  50  per  cent, 
although  sometimes  33  1/3  per  cent  is  awarded.     The 


OPERATION  TIME  CARD 


PAY  ENDING- 


OEPT.  NO.  MAN'S  NO. 


machine.no.  oroebno, 


NAME  OF  PART 


BATCH  NO.         NO.  OF  BATCH 


Time  AlIoFCd 


DATE       TIME       DATE       TIME 


i       16  2   17  3   18  4   19  5   20 


9      2410  25 


11  26 


12  27 


13  28 


21 


14  29 


22 


»   23 


15  30 


31 


TIMEALIOWEO 


UNIICOST  Tulal  Time  Allowed     TOTAL  TIME  TAKEN    TOTAL  TIME  SAVED  AMOUNT 


Figure  43. — time  card  used  with  the  halsey  premium  wage  system 


workman  receives  his  hourly  rate  for  the  time  actually 
spent  on  the  work,  plus  half  or  one-third  of  the  time  saved 
on  the  standard. 

A  time  card  used  on  the  Halsey  system  is  shown  in 
Figure  43  and  it  may  be  noted  that  the  calculation  is 
relatively  easy.  Here  again,  as  to  costing  disposition  the 
differential  may  be  charged  into  costs  directly  or  into 
the  overhead  with  the  same  arguments  pro  and  con  as 
were  presented  in  the  handling  of  the  differential  piece 
rate. 


136 


ESSENTIALS  OP  INDUSTRIAL  COSTING 


5.  The  Roivan  Premium  Plmi. — The  Rowan  Premmm 
Plan  was  devised  hj  a  member  of  the  firm  of  the  David 
Rowan  Company  of  Scotland  and  it  is  comparable  in 
part  to  the  Halsey  Premium  Plan  in  that  a  standard  is 


RET'D 
ISS'D 

CHARGE 

MAN'S  NAME 

DEPT- 

MAN'S  NO. 

TIME   ALLOWED 

TIME  TAKEN 

FINISHED 

NOT  FINISHED 

BONUS 

HOURLY  RATE 

TRANSFERRED 

PAY  FOR 

WAGES 

BREAKDOWN 

CAUGHT   UP 

MACHINE   NO. 

MACHINE   EXPENSE 

MAN   EXPENSE 

OPEFiATION 

ORDER 
NO. 

ARTICLC 

OPER. 
NO. 

AMOUNT 
FINISHED 

WAGES 

ENTERED    IN 

O.  K.  FOR  QUALITY 

O.  K.  FOR  QUANTITY 

OEPT. 
CLERK 

SCHCO- 
UtE 

MAN 
RECORD 

PAV 
ROLL 

COST 
RECORD 

75M  2-18  Form  B 150                             PRODUCTION  CARD                                                                 J 

Figure  44. — time  card  used  with  the  gaktt  task  and  bonus  system 


set  and  payment  made  for  reduction  below  the  standard 
of  the  time  for  doing  the  work.  It  differs  from  the  Hal- 
sey Plan  in  that  the  percentage  of  premiums  is  not  fixed 
but  is  determined  by  the  relation  of  the  time  saved  to  the 
time  allowed.  For  instance,  if  a  standard  for  a  job  is  set 
at  five  hours  and  one  hour  is  saved,  the  percentage  would 


COSTING  OF  LABOR  137 

be  one-fifth,  or  20  per  cent.  The  operative  would  receive 
four  hours '  pay  at  clay  rate,  say  60  cents  or  $2.40  and  a 
premium  of  20  per  cent  or  48  cents,  making  a  total  pay 
of  $2.88.  To  the  author's  knowledge  the  Eowan  system 
is  rarely  used  in  this  country  and  it  has  been  impossible 
to  secure  a  time  card  representing  the  application  of  the 
system. 

6.  The  Gantt  Task  and  Bonus  System. — The  Gantt 
Task  and  Bonus  System  of  wage  payment  adopts  the 
Taylor  principle  of  a  sharp  hiatus  between  high  and  low 
production.  The  Gantt  system  does  not  rest  on  a  piece 
rate  but  pays  at  day  rate  for  all  actual  time,  plus  a  bonus 
for  reaching  a  standard.  If  the  standard  is  not  met,  no 
bonus  is  paid  and  there  are  no  graduations  for  degrees 
of  approach  to  the  standard.  Either  the  standard  is 
reached  or  it  is  not,  and  the  payment  of  a  bonus  is  based 
accordingly.  A  production  card  used  in  connection  with 
the  Gantt  Task  and  Bonus  System  is  illustrated  in 
Figure  44. 

7.  The  Emerson  Bonus. — The  Emerson  Bonus,  fre- 
quently called  the  Efficiency  System,  is  an  exceedingly 
ingenious  arrangement  which  not  only  seiwes  as  a  basis 
for  wage  payment,  but  also  as  an  index  of  the  operating 
efficiency  of  the  individual,  the  department,  or  the  entire 
plant.  It,  too,  is  based  upon  a  time  standard  and  the 
percentage  relation  of  that  standard  to  actual  perform- 
ance. This  relation  may  be  more  clearly  expressed  in 
the  form  of  an  equation,  as  follows : 

Let 

E  =  efficiency 

S  =:  standard  time 

A  =:  actual  time 
Then 


138 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  45. — Standard  Bonus  Percentage  Table  for  Use  in  Deter^ 
MINING  Bonus  Earnings 


Bonus  Percentage  of 

Bonus  Percentage  of 

Per  Cent 

Wages 

Per  Cent 

Wages 

Effici- 
ency 

Effici- 
ency 

20 

33>^ 

50  Per 

20 

33H 

50  Per 

Per  Cent 

Per  Cent 

Cent 

Per  Cent 

Per  Cent 

Cent 

66.7 

0.00 

0.00 

0.00 

84.5 

5.85 

9.75 

14.62 

67.0 

0.01 

0.02 

0.03 

85.0 

6.17 

10.28 

15.42 

67.5 

0.02 

0.03 

0.04 

85.5 

6.50 

10.83 

16.24 

68.0 

0.04 

0.07 

0.10 

86.0 

6.84 

11.40 

17.10 

68.5 

0.07 

0.12 

0.18 

86.5 

7.20 

12.00 

18.00 

69.0 

0.11 

0.18 

0.27 

87.0 

7.56 

12.60 

18.90 

69.5 

0.16 

0.27 

0.40 

87.5 

7.94 

13.23 

19.84 

70.0 

0.22 

0.37 

0.55 

88.0 

8.32 

13.87 

20.80 

70.5 

0.29 

0.48 

0.72 

88.5 

8.71 

14.52 

21.78 

71.0 

0.37 

0.61 

0.91 

89.0 

9.11 

15.18 

22.77 

71.5 

0.46 

0.76 

1.14 

89.5 

9.51 

15.85 

23.77 

72.0 

0.55 

0.92 

1.38 

90.0 

9.91 

16.52 

24.78 

72.5 

0.65 

1.08 

1.62 

90.5 

10.32 

17.20 

25.80 

73.0 

0,76 

1.27 

1.90 

91.0 

10.74 

17.90 

26.85 

73.5 

0.88 

1.47 

2.20 

91.5 

11.18 

18.63 

27.94 

74.0 

1.02 

1.70 

2.54 

92.0 

11.62 

19.37 

29.05 

74.5 

1.16 

1.93 

2.89 

92.5 

12.08 

20.13 

30.19 

75.0 

1.31 

2.18 

3.27 

93.0 

12.56 

20.93 

31.39 

75.5 

1.47 

2.45 

3.67 

93.5 

13.04 

21.73 

32.59 

76.0 

1.64 

2.73 

4.09 

94.0 

13.52 

22.53 

33.79 

76.5 

1.81 

3.02 

4.53 

94.5 

14.02 

23.37 

33.05 

77.0 

1.99 

3.32 

4.98 

95.0 

14.53 

24.22 

36.32 

77.5 

2.18 

3.64 

5.46 

95.5 

15.04 

25.07 

37.60 

78.0 

2.38 

3.97 

5.95 

96.0 

15.56 

25.94 

38.91 

78.5 

2.59 

4.32 

6.47 

96.5 

16.09 

26.82 

40.23 

79.0 

2.80 

4.67 

7.00 

97.0 

16.62 

27.70 

41.55 

79.5 

3.03 

5.05 

7.57 

97.5 

17.16 

28.60 

42.90 

80.0 

3.27 

5.46 

8.17 

98.0 

17.70 

29.50 

44.25 

80.5 

3.52 

5.87 

8.80 

98.5 

18.25 

30.42 

45.63 

81.0 

3.78 

6.30 

9.45 

99.0 

18.81 

31.35 

47.02 

81.5 

4.05 

6.75 

10.12 

99.5 

19.39 

32.32 

48.48 

82.0 

4.33 

7.22 

10.85 

100.0 

20.0 

33.33 

50.0 

82.5 

4.62 

7.70 

11.55 

100.5 

20.5 

33.83 

50.5 

83.0 

4.92 

8.20 

12.30 

101.0 

21.0 

34.33 

51.0 

83.5 

5.23 

8.71 

13.07 

101.5 

21.5 

34.83 

51.5 

84.0 

5.53 

9.22 

13.84 

COSTING  OF  LABOR 


139 


The  bonus  is  applied  on  a  percentage  of  the  day  rate 
earnings.  The  original  percentages  were  graded  as 
shown  in  Figure  45,  the  20  per  cent  bonus  at  100  per  cent 
efficiency  is  the  prevailing  scale  in  practice.  The  time,  or 
service,  card  used  in  this  system  is  illustrated  in  Figure 
46.    In  some  cases  it  is  applied  by  calculating  the  average 


Fm.29i.-«-13. 

SERVICE  CARD. 

W.  M.  W. 

LOT 
NO. 

AMT. 
RCQ'O                                            Size 

DATE  OF 
ORDER 

OPERATION 
NO. 

NAME  OF 
OPERATION 

PRODUCTION 

TIME 

MEN  EMPLOYED 

COST                     j 

NAME 

RATE 

AMOUNT       1 

BALANCE 
TO     DO 

QUIT 

STARTED 

DO  TODAY 

»OB HRB. 

ELAPSED 

FINISHED 

ALLOWANCt 

DATE 

SCHEDULE 
NO. 

STD. 
QUANTITY 

PCS.  pen 

HOUR 

BALANCE 

NET 
ACTUAL 

STD. 
TIME 

Pen  100 

TOTAL    «T0. 

"•V*V 

nnr^ 

MCN 

Figure  46. — service  card 


efficiency  of  all  jobs  within  the  payroll  period,  in  which 
case  some  form  of  collection  note  must  be  used  and  this 
is  illustrated  in  Figure  47. 

As  to  costs,  if  the  bonus  is  figured  for  each  job,  it  may 
be  charged  directly;  if  it  is  figured  for  a  week  as  an 
average  of  many  jobs,  it  can  only  be  handled  economi- 
cally in  overhead.  In  the  former  case  it  may  also  be 
treated  as  an  item  in  overhead  and  in  the  author's  experi- 
ence this  method  of  handling  the  bonus  is  fully  satis- 
factory. 

Service  and  Attendance  Bonus.— In  modern  times 
recognition  of  service  is  frequently  made  by  corporations 
to  employees  who  merit  it.    This  is  done  by  various  meas- 


140 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


ures.  Sometimes  it  is  a  certain  amount  per  hour  per  year 
of  service  or  sometimes  a  fixed  amount  per  week.  Also, 
under  recent  conditions  certain  employees  took  advan- 


BONUS    RECORD 

Week  Endir 

OiU 

Oi^rN. 

Aitdt             DiubtT 

^1 

Adul 
Tmt 

OiU 

OrdoNr 

Kitdt 

CautilT 

Tmt 

Adul 

Tttal 

1 

1             '=^ 

Bmu 

Pcubu 

Figure   47. — boxus   record 


tage  of  higher  wages  in  working  fewer  hours  and  were 
satisfied  with  their  old  week's  wage  which  they  found 
they  could  make  in  less  time.    To  counteract  this  baneful 


tt     40     eo     60     100     170     140    leo     lao    zoo    zzo    zw    zw    tso    zoo 
56  PRODUCTION 

Figure  48, — graphical  comparative  representation  op  the  various  dif- 
ferential   WAGE    systems 

The  percentage  of  production  has  no  influence  on  day  wages,  ■which  will  always 
remain  at  100  per  cent  whether  the  operator  produces  at  10  or  300  per  cent. 

Straight  piece  rate  or  the  low  rate  of  a  differential  piece  rate  plan  coincides 
up  to  100  per  cent,  when  the  differential  piece  rate  is  increased,  perhaps,  50  per  cent 
and  then   is   increased   in  proportion  to   increased   production   as  indicated. 

"Time  and  piece"  rates  above  a  certain  minimum  (in  this  case  taken  at  60  per 
cent)  correspond  with  day  wages  up  to  the  time  that  output  equals  60  per  cent 
of  standard,  when  they  change  to  a  piece-work  plan  for  all  increased  production. 

The  Gantt  30  per  cent  bonus  plan  follows  the  line  A-C-H,  increasing  30  per  cent 
over  day  wages  at  100  per  cent  production,  and  from  then  on  increasing  in  the  pro- 
portion  indicated. 

The  Emerson  efficiency  plan  begins  to  increase  wages  at  66  2/3  per  cent  and 
pays  20  per  cent  more  than  day  wages  at  100  per  cent  production ;  from  then  on  it 
pays  the  percentage  as  shown. 

The  Halsey  premium  method  pays  day  wages  (line  A-C)  until  production  is  equal 
to  the  best  previous  record  (here  assumed  to  be  100  per  cent).  AH  increased  output 
is  paid   in   the  proportion  indicated. 

The  Rowan  premium  plan   differs  from  the  Halsey  as  indicated. 

141 


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143 


COSTING  OF  LABOR  143 

tendency  attendance  bonuses  were  paid  based  upon  a 
minimum  attendance.  Both  the  service  and  attendance 
bonus,  if  readily  converted  to  an  hourly  rate,  may  be 
figured  as  productive  labor.  However,  due  to  variations 
in  the  method  of  award,  etc.,  it  may  be  expensive  and  the 
service  and  attendance  bonus  may  be  carried  in  the  over- 
head of  the  department. 

Discussion  of  the  Differential  Wage  System  would  not 
be  complete  without  graphical  representation  by  means 
of  which  the  lines  of  agreement  and  points  of  departure 
may  be  portrayed.  This  has  been  accomplished  excel- 
lently in  the  graph  and  accompanying  explanation  shown 
in  Figure  48  which  was  developed  by  the  United  States 
Training  Service. 

The  unit  costs  as  developed  from  the  time  or  cost  cards 
are  posted  to  operation  cost  sheets  or  the  time  is  posted 
to  order  cost  records.  Typical  operation  and  order  cost 
forms  are  shown  in  Figures  49  and  50.  Cost  cards  also 
supply  the  basis  of  the  labor  distribution,  which  in  the 
previous  chapter  has  been  stated  to  be  one  of  the  chief 
sources  of  costing  data. 

Administrative  and  Office  Salaries. — The  foregoing  dis- 
cussion has  treated  entirely  of  shop  wages.  There  is 
another  part  of  the  payroll  which  must  be  distributed 
and  that  is  the  office,  administrative  salaries,  although 
such  departments  as  engineering,  drafting,  and  labora- 
tory are  encountered,  which  seem  to  pertain  more  closely 
to  production  than  clerical  and  official  salaries.  Fre- 
quently portions  of  the  salaries  in  such  departments  can 
be  charged  directly  to  production  and  whenever  this  can 
be  done  it  should  be.  It  is  good  policy  to  carry  to  fine 
divisions  the  office,  technical,  and  administrative  salaries, 
as  it  facilitates  their  distribution  and  assists  their 
control. 


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144 


COSTING  OF  LABOR  145 

The  costing  of  labor  has  been  discussed  at  length.  The 
object  has  been  to  present  the  essentials  and  sufficient 
details  to  illustrate  the  practice  and  to  indicate  the  com- 
plex conditions  which  frequently  confront  labor  costing 
efforts. 


CHAPTER  YIl 

THE   COLLECTION  OP  EXPENSE  IN   COSTING 

Control  is  possible  only  when  accurate  knowledge  of  the  amounts 
entering  into  each  item  composing  overhead  are  known. — Chamber  of 
Commerce  of  the  United  States  of  America. 

Nature  of  Expense.— Expense  lias  been  seen  to  consist 
of  two  classifications  determined  by  the  functional  attri- 
butes of  eacli,  nanielj": 

Manufacturing  expense 
Selling  expense 

For  the  purpose  of  this  chapter,  however,  the  two 
classifications  may  be  considered  as  one,  because  the 
process  of  the  collection  of  expense  is  identical  for  both 
and  the  composition  of  expense  is  similar  in  many  items. 

Expense  has  been  described  as  an  accounting  complex, 
the  truth  of  which  designation  would  be  better  appre- 
ciated if  the  nature  of  expense  could  once  be  perceived. 
For  expense  is  a  control  center  in  which  are  collected  all 
those  items  which  cannot  be  allocated  directly  to  the 
product  and  from  which  the  expenditures  thus  pooled  are 
prorated  and  distributed  and  ultimately  applied  to  the 
product  with  as  close  approximation  as  possible  to  what 
would  have  been  their  incidence  as  direct  charges. 

The  necessity  for  intelligence  and  ingenuity  in  the 
design  of  this  part  of  the  costing  mechanism  may  be  bet- 
ter realized  when  it  is  understood  that  often  as  much  as 
30  per  cent  and  occasionally  as  much  as  60  per  cent  of 
all  expenditures  must  be  transmitted  to   the  product 

146 


COLLECTION  OF  EXPENSE  IN  COSTING         147 

through  expense.  If  the  disproportionate  relations 
among  the  various  elements  of  expense  are  considered, 
the  wheel  within  wheel  aspect  of  the  mechanism  realized, 
the  matter  of  the  costing  of  expense  may  be  approached 
with  a  proper  recognition  of  its  great  inherent  difficulties 
and  the  fact  that  accuracy  in  it,  like  infinity,  is  a  con- 
ception measured  by  degrees  of  approach,  not  arrival. 

Expense  Departments.— In  devising  the  costing  of  ex- 
pense probably  the  chief  influence  upon  accuracy  is  the 
basis  of  division  into  those  precincts  of  expense  known 
as  departments.  These  departments  consist  of  two  tj^es, 
contributing  and  productive,  which,  as  mentioned  before, 
are  analogous  to  the  indirect  and  direct  division  of  labor 
and  material.  Departmentalization,  as  it  is  called,  is  a 
means  of  securing  closer  costing  of  expense  to  product 
than  may  be  done  in  any  other  way.  It  is  difficult  to  pre- 
scribe a  rule  which  would  apply  without  exception  as  to 
what  procedure  is  required  in  establishing  productive 
departments,  "for  rules  are  made  for  average  conditions, 
but  the  average  is  a  composite  of  variations." 

Practical  limits  often  set  the  boundaries  of  depart- 
ments, some  executives  being  disposed  to  curtail  the 
number  of  departments  to  save  clerical  detail.  Others 
desire  the  finest  division.  Certainly,  if  accuracy  is  the 
objective,  it  is  better  to  err  on  the  side  of  too  many  rather 
than  too  few  departments.  The  nature  of  the  process, 
or  the  extent  and  arrangement  of  the  equipment,  govern 
largely  the  departments.  Originally  the  necessity  for 
this  division  into  departments  arose  with  the  advent  of 
machinery  and  the  disparity  not  only  between  the  num- 
ber of  machines  required  for  different  operations,  but 
also  between  the  investment  values  of  the  different  ma- 
chines within  the  same  machine  grouping. 

The  extent  of  machine  production  and  the  ratio  of 


148  ESSENTIALS  OF  INDUSTRIAL  COSTING 

employees  to  the  mimber  of  machines  within  different 
industries  has  a  definite  connection  with  the  form  of  the 
cost  system  and  the  departments  of  expense.  The  fol- 
lowing data  taken  from  the  transactions  of  the  Ameri- 
can Society  of  Mechanical  Engineers  may  throw  some 
light  on  this  important  consideration: 

Number  of  ^Machines  Per  100  Employees 

Earthenware  manufacture   17 

Furniture  manufacture 40 

Rubber  goods  manufacture 60 

Printing  manufacture  67 

Cotton  mills  manufacture 357 

It  is  obvious  that  with  a  high  ratio  of  machines  to 
employees  the  element  of  expense  takes  increased  impor- 
tance and  departmentalization  becomes  a  more  crucial 
necessity.  The  distribution  of  machinery  forms,  many 
times,  natural  boundaries  for  departments  although,  of 
course,  machine  disposition  is  made  with  the  central 
purpose  of  facilitating  the  flow  in  production.  Bearing 
on  this  point  I  quote  an  earlier  work  of  mine : 

Arrangement  of  Equipment. — There  are  essentially  two  main 
plans  according  to  which  equipment  may  be  arranged  in  order 
to  meet  productive  requirements,  although  in  many  plants  the 
plans  will  be  found  at  times  to  have  been  merged.  The  two 
essential  arrangements  might  be  called: 

Production  Center  arrangement 
Unit  arrangement 

The  production — center  arrangement — calls  for  the  centering 
of  machines  of  the  same  type  and  capacity  in  separate  depart- 
ments or  lo«ations.  It  means  the  massing  of  similar  equipment 
at  definite  stations,  with  the  object  of  concentrating  the  pro- 
ductive capacity  in  order  to  meet  the  operating  requirements  of 
demand  with  the  minimum  of  machine  inactivity  and  the  great- 
est output  per  machine  unit.  By  this  method  the  demand  on 
production  is  combined  and  routed  to  meet  the  fixed  basis  of  the 
machine  layout. 

The  principle  of  the  unit  arrangement  is  diametrically  oppo- 
site to  that  of  the  production  center  plan.    It  provides  definite 


COLLECTION  OF  EXPENSE  IN  COSTING         149 

channels  for  complete  processing  whereby  the  machines  are  lo- 
cated in  succession  for  the  sequence  of  operations,  and  these 
channels,  or  units,  govern  distinct  currents  of  production.  That 
is,  the  demand  is  not  merged  or  interchanged  over  the  equip- 
ment but  is  divided  into  currents  that  flow  separately  through 
the  several  units  in  each  of  which  production  proceeds  uninter- 
ruptedly. 

Where  the  unit  arrangement  exists,  either  a  unit  cost 
may  be  obtained,  each  unit  being  regarded  as  a  separate 
plant  for  the  purpose,  or  departmental  classification  may 
be  made  within  the  unit  and  separate  rates  established 
for  purposes  of  comparison  with  other  units  or  closer 
examination  of  the  unit  cost.  The  production  center  ar- 
rangement prevails  to-day  in  manufacture  and  the  so- 
called  centers  establish  the  logical  divisions  into  depart- 
ments. It  must  be  understood,  however,  that  frequently 
costing  may  require  finer  analysis  than  the  production 
center,  for  if  the  sizes  of  similar  machines  within  a  center 
range  widely  and  within  them  the  relative  investment,  it 
may  be  necessary  to  isolate  the  single  machine  into  a 
department,  of  which  later,  under  ' '  Machine  Hour  Rate ' ' 
(p.  211). 

Basis  of  Departmentalization.— The  underlying  prin- 
ciple in  departmentalizing  is  to  localize  expense  to  cen- 
ters or  foci  of  similar  or  identical  kind,  at  which  the 
product  may  receive  a  representative  quota  of  the  ex- 
pense at  each  of  the  centers  thus  established.  Contrib- 
uting, or  indirect,  departments  are  determined  by  the 
conditions  of  the  particular  manufacture.  In  general 
they  are  typified  as  follows : 

Office 

Laboratory 

Engineering  department 
Heat,  light  and  power 
Repair  machine  shop 
Repair  carpenter  shop 
Millwright  and  maintenance 
General 


150  ESSENTIALS  OF  INDUSTRIAL  COSTING 

The  selection  of  the  contributing  departments  is  deter- 
mined by  the  various  nonproductive  functions,  such  as 
office,  power,  etc.,  the  extent  of  division  into  contributing 
being  governed  by  the  desire  for  finer  analysis  for  con- 
trol, or  because  the  ultimate  distribution  over  the  pro- 
ductive departments  may  be  facilitated  thereby.  The  dis- 
tribution of  the  contributing  department  over  the  pro- 
ductive department  will  be  considered  in  a  later  chapter. 

The  productive  departments  are  determined  by  the 
equipment  arrangement  and  the  amount  of  investment 
represented  by  it.  Within  each  department  are  collected 
the  various  items  of  expense  charged  there  directly  and 
those  prorated  from  the  contributing  departments.  These 
items  in  expense  are  collated  by  departments  from  sev- 
eral sources  of  information,  as  follows: 

Indirect,  or  non-productive  labor  distribution 
Indirect,  or  non-productive  material  distribution 
Indirect  expenditures  from  Voucher  Register 
Journal  entries  covering  contingent  and  accrued  items 

Collection  of  Expense. — It  may  be  gathered  that  the 
array  of  figures  covered  by  the  above  is  considerable  and 
that  devising  the  form  or  method  by  which  such  figures 
are  collected,  or  ultimately  resolved  in  proper  propor- 
tion to  the  point  of  application  to  the  product,  and  are 
held  at  all  times  to  proof  control  comprises  a  complicated 
problem.  In  some  cases  this  is  arranged  by  a  series  of 
interlocking  subsidiary  ledger  accounts  in  which  the  vari- 
ous items  are  ac<?umulated  and  then  distributed  to  the 
department  to  which  they  belong  in  proper  proportion 
for  the  various  items  in  each  department,  but  this  unfor- 
tunately results  in  an  enormous  number  of  accounts  and 
great  clerical  labor. 

Nicholson,  one  of  our  foremost  authorities,  has  stated 
this  situation  succinctly,  as  follows: 


COLLECTION  OF  EXPENSE  IN  COSTING         151 

Each  item  of  indirect  expense  is  applicable  to  definite  operat- 
ing departments  and  provision  must  be  made  for  shoAving  the 
charge  in  each  case.  The  simplest  method  is  to  open  an  account 
for  each  item  of  overhead  for  each  department  and  this  is  the 
method  used  in  large  concerns.  The  obvious  drawback  to  this 
method  is  the  large  number  of  expense  accounts  which  it  entails. 

Expense  Analysis.— This  problem  is  solved  in  various 
waj^s,  and  I  would  like  to  describe  the  Expense  Analysis 
as  a  record  permitting  of  minnte  subdivision  of  expense 
items  which  at  the  same  time  is  compact  and  subject  to 
exact  proof  and  considerably  less  burdensome  in  clerical 
labor  than  the  separate  account  for  each  item  in  each 
department  method.  The  Expense  Analysis  provides 
for  current  monthly  cumulative  totals  of  all  items  in 
expense  for  the  year  and  has  parallel  columns  for  com- 
parative purposes  of  the  same  figures  for  the  previous 
year.  Each  item  of  expense  within  the  department  has 
a  separate  line  which  is  lettered  and  which  with  the 
number  of  the  department  combines  to  supply  an  identi- 
fying code  number  by  which  the  item  is  known. 

The  grouping  of  items  is  arranged  to  show  all  the 
controllable  or  direct  expense  at  the  top  and  the  fixed 
or  indirect  expense  underneath.  Totals  of  each  are  listed 
and  then  a  grand  total  of  both  is  shown  which,  with  the 
productive  labor  also  shown,  establishes  the  percentage 
relation  or  overhead  rate. 

This  discussion  will  be  amplified  in  Chapter  IX  and 
the  Expense  Analysis  is  mentioned  and  illustrated  here- 
with chiefly  to  show  how  it  applies  to  representative 
industries.  Accordingly,  the  following  illustrations 
(Figures  51,  52,  53)  of  an  expense  analysis  for  a  textile 
plant,  a  foundry,  and  a  machine  shop,  for  typical  depart- 
ments, are  presented.  These  include  only  a  few  depart- 
ments to  show  the  essential  lines  of  departmentalizing. 


152 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


FiQURE  51. — Specimen  Expense  Analysis  for  Selectted  Departments 
OF  A  Cotton  Mill 


No.  30 


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19. 


picking  and  carding 


Share  overseer's  wages 
Second  hands'  wages  . . 
Picker  tenders'  wages  . 
Card  tenders'  wages  . . . 
Drawing  tenders'  wages 


Oil  and  waste 

Brooms  and  brushes 

Card  clothing   

Belting 


Miscellaneous  supplies 
Miscellaneous  expense 


Millwright  repair  labor    

Millwi-ight  repair  materials  . . . 
Machine  shop  repair  labor  . . . 
Machine  shop  repair  expense  . 
Machine  shop  repair  materials 


Share  of  liability  insurance 

Total  direct  expense 

Share  of  taxes   

Share  of  insurance    

Share  of  depreciation 

Share  of  heat,  light  and  power 
Share  of  general  factory 


Total  indirect  expense   

Total  picking  and  carding  expense 


Pounds  carded 


Total  picking  and  carding  cost  per  lb 


Month  of 


Period  to 
Date 


COLLECTION  OF  EXPENSE  IN  COSTING 


153 


Figure  51. — Specimen  Expense  Analysis  for  Selected  Departments 
OF  A  CoiTON  Mill   (Continued) 


FLY   FRAMES 


Share  overseer's  wages    

Share  second  hands'  wages  . . . 
Share  third  hands'  wages  

Bobbins  

Oil  and  waste 

Brooms  and  brushes 

Roll  covering 

Belting   

Skeiners  

Miscellaneous  expense 

Miscellaneous  supplies 

Millwright  repair  labor    

Millwright  repair  materials  . . . 
Machine  shop  repair  labor  . . . 
Machine  shop  repair  expense  . 
Machine  shop  repair  materials 

Share  liability  insurance 

Total  direct  expense 

Share  of  taxes    

Share  of  insurance    

Share  of  depreciation 

Share  of  heat,  light  and  power 
Share  of  general  factory 

Total  indirect  expense   

Total  fli/  frame  expense 

Spindle  weeks  run 

Slubbers    

Intermediates   

Fine  frames 

Total  spindle  weeks  

Active  spindle  weeks 

Per  cent  activity 

Cost  per  active  spindle  week  . . 


19. 


Month  of 


Period  to 
Date 


154 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  51. — Specimen  Expense  Analysis  for  Selected  Departments 
OF  A  Cotton  Mill  (Continued) 


No.  32 


A 

B 

C 

D 

E 

F 

G 

H 

I 

J 

K 

L 

M 

N 

O 

P 

Q 

R 

S 
T 
U 


Z 

AA 

BB 

CC 

DD 

EE 

FF 

GG 

HH 

II 

JJ 

KK 

LL 

MM 

NN 

00 

PP 


AAA 


SPINNING  DEPARTMENT 


Share  overseer's  wages 
Second  hands'  wages  . . 

Roving  men 

Section  hands 


Bobbins  

Oil  and  waste 

Brooms  and  brushes  . . 

Roll  covering 

Belting  

Skeining 

Miscellaneous  supplies 
Miscellaneous  expense 


Millwright  repair  labor    

Millwi'ight  repair  expense 

Millwright  repair  materials  . . . 
Machine  shop  repair  labor  . . . 
Machine  shop  repair  expense  . 
Machine  shop  repair  materials 


Share  of  liability  insurance  . . . . 

Total  direct  expense 

Share  of  taxes   

Share  of  insurance    

Share  of  depreciation 

Share  of  heat,  light  and  power 
Share  of  general  factory 


Total  indirect  expense  

Total  spinning  department  expense 


Total  spindle  weeks  . . 
Cost  per  spindle  week 


19. 


Month  of 


Period  to 
Date 


COLLECTION  OF  EXPENSE  IN  COSTING 


155 


Figure  51. — Specimen  Expense  Analysis  for  Selected  Departments 
OF  A  Cotton  Mill  (Continued) 


Miscellaneous  supplies 
Miscellaneous  expense 


weaving  department 


Share  overseer's  wages 
Second  hands'  wages  . . 
Third  hands'  wages  .  . , . 
Loom  tenders'  wasres  . . 


Harness 
Shuttles 

Belting 


Millwright  repair  labor    

Millwright  repair  expense   . . . 
Machine  shop  repair  labor    . . 
Machine  shop  repair  expense 
Machine  shop  repair  materiah 


Share  of  liability  insurance  . . . . 

Total  direct  expense 

Share  of  taxes   

Share  of  insurance    

Share  of  depreciation 

Share  of  heat,  light  and  power 
Share  of  general  factory 


Total  indirect  expense    

Total  weaving  department  expense 

Loom  hours 

Active  loom  hours  


Cost  per  active  loom  hour 


19. 


Month  of  I    Period  to 
Date 


156 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  52. — Specimen  Expense  Analysis  for  Selected  Departments 

OP  A  Foundry 


No.  10 


A 

B 

C 

D 

E 

F 

G 

H 

I 

J 

K 

L 

M 

N 

O 

P 

Q 

R 

S 

T 

U 

V 

W 

X 

Y 

Z 

AA 

BB 

CC 

DD 

EE 

FF 

GG 

HH 

II 

JJ 

KK 

LL 

MM 

NN 


AAA 


melting  department 


Foreman's  wages  

Charging  floor  labor 

Handling  iron,  coke  and  coal  labor 

Coke   

Coal    

Wood    

Reserve  for  relining 

Miscellaneous  supplies    

Miscellaneous  expense 

Millwright  repair  labor    

Millwright  repair  materials 

Machine  shop  repair  labor    

Machine  shop  repair  expense   .  . . 
Machine  shop  repair  materials  . . 

Share  of  liabilitj-  insurance 

Total  direct  expense 

Share  of  taxes   

Share  of  insurance    

Share  of  depreciation 

Share  of  heat,  light  and  power  . 
Share  of  general  factory 

Total  indirect  expense 

Total  iron  melting  expense   

Pounds  good  castings  made 

Total  cost  per  pound 


19. 


Month  of 


Period  to 
Date 


COLLECTION  OF  EXPENSE  IN  COSTING 


157 


Figure  52. — Specimen  Expense  Analysis  for  Selected  Departments 
OF  A  Foundry  {Continued) 


CORE  DEPARTMENT 


Foreman's  wages   . 
Undistributed  labor 

Sand  

Binder    

Core  wire    


Miscellaneous  supplies 
Miscellaneous  expense 


Millwright  repair  labor    

Millwright  repair  materials  . . . 
Machine  shop  repair  labor  . . . 
Machine  shop  repair  expense  . 
Machine  shop  repair  materials 


Share  of  liability  insurance  . . . . 

Total  direct  expense 

Share  of  taxes   

Share  of  insurance   

Share  of  depreciation 

Share  of  heat,  light  and  power 
Share  of  general  factory 


Total  indirect  expense  . . 
Total  core  making  labor  . 
Per  cent  expense  to  labor 


19. 


Month  of 


Period  to 
Date 


158 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  52. — Specimen  Expense  Analysis  fob  Selected  Departments 
OP  A  Foundry  {Continued) 


No.  12 


MOULDING  department 


19. 


Month  of 


Period  to 
Date 


A 
B 
C 
D 

E 

F 

G 

H 

I 

J 

K 

L 

M 

N 

0 

P 

Q 

R 
S 
T 
U 
V 

w 

X 

Y 

Z 

AA 

BB 

cc 

DD 

EE 

FF 

GG 

HH 

II 

JJ 

KK 

LL 

MM 

NN 


AAA 


Foreman's  wages 


Sea  coal  

Graphite 

Moulding  sand   . . . . 

Choplets,  etc 

Brushes,  small  tools 


Miscellaneous  supplies 
Miscellaneous  expense  . 


Millwright  repair  labor   

Millwright  repair  materials  . . . 
Machine  shop  repair  labor  . . . 
Machine  shop  repair  expense  . 
Machine  shop  repair  materials 


Share  of  liability  insurance  . . . 

Total  direct  expense 

Share  of  taxes   

Share  of  insurance   

Share  of  depreciation 

Share  of  heat,  light  and  power 
Share  of  general  factory 

Total  indirect  expense  

Total  moulding  expense   

Moulding  productive  labor  .... 
Per  cent  expense  to  labor 


COLLECTION  OF  EXPENSE  IN  COSTING 


159 


Figure  52. — Specimen  Expense  Analysis  for  Selected  Departments 
OP  A  Foundry  (Continued) 


cleaning  department 


19. 


Month  of 


Period  to 
Date 


Millwright  repair  labor    

Millwright  repair  materials  . . . 
Machine  shop  repair  labor  . . . 
Machine  shop  repair  expense  . 
Machine  shop  repair  materials 


Foreman's  wages 


Tumbling  shot  . . 
Chipping  chisels 


Miscellaneous  supplies 
Miscellaneous  expense 


Share  of  liability  insurance 

Total  direct  expense 

Share  of  taxes   

Share  of  insurance   

Share  of  depreciation 

Share  of  heat,  light  and  power 
Share  of  general  factory 


Total  indirect  expense    

Total  cleaning  department  expense  . . 
Total  cleaning  department  labor  .... 
Total  cleaning  dept.  labor  and  expense 
Distribution 


160 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  53. — Specimen  Expense  Analysis  for  Selected  Departments 
OP  A  Machine  Shop 


No.  20 


TOOL  ROOM 


19.. 


Month  of 


Period  to 
Date 


A 

B 

C 

D 

E 

F 

G 

H 

I 

J 

K 

L 

M 

N 


X 

Y 

Z 

AA 

BB 

CC 

DD 

EE 

FF 

GG 

HH 

II 

JJ 

KK 

LL 

MM 

NN 

00 

PP 

QQ 

RR 


YY 
ZZ 
AAA 
BBB 


Foreman's  wages   . . 
Undistributed  labor 


Drills    

Reamers  

Milling  cutters 
Files   


Miscellaneous  supplies 
Miscellaneous  expense 


Share  of  liability  insurance  . . . . 

Total  direct  expense 

Share  of  taxes   

Share  of  insurance   

Share  of  depreciation 

Share  of  heat,  light  and  power 


Total  indirect  expense 

Total  tool  room  expense 

Total  tool  room  chargeable  labor. 

Per  cent  expense  to  labor 

Distribution  

Chargeable  labor  and  expense  ... 

New  tools  and  machines 

Engine  lathe  department 


Screw  machine  department  . 
Drill  press  department  .... 
Milling  machine  department 


COLLECTION  OF  EXPENSE  IN  COSTING         161 

Figure  53. — Specimen  Expense  Analysis  for  Selected  Departments 
OF  A  Machine  Shop  (Continued) 


engine  lathe  department 


19.... 


Month  of 


Period  to 
Date 


Foreman's  wages 


Belting  

Cutting  lubricant 


Miscellaneous  supplies 
Miscellaneous  expense 


Millwright  repair  labor 

Millwright  repair  materials  . . . 
Machine  shop  repair  labor  . . . 
Machine  shop  repair  expense  . 
Machine  shop  repair  materials 


Share  of  liability  insurance 

Total  direct  expense  

Share  of  taxes   

Share  of  insurance    

Share  of  depreciation 

Share  of  heat,  light  and  power  . . , 

Share  of  tool  room  

Share  of  general  factory 

Total  indirect  expense  

Total  engine  lathe  expense   

Total  engine  lathe  productive  labor 
Per  cent  expense  to  labor , 


162 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  53. — Specimen  Expense  Analysis  for  Selected  Departments 
OP  A  Machine  Shop  (Continued) 


No.  22 


A 
B 
C 
D 

E 
F 


M 

N 
O 
P 

Q 

R 

S 

T 

U 

V 

W 

X 

Y 

Z 

AA 

BB 

CC 

DD 


LL 
MM 

NN 
00 
PP 

QQ 

RR 

SS 


WW 

XX 

YY 

ZZ 

AAA 


screw  machine  department 


Foreman's  wages   

Operator's  wages  

Belting  

Cutting  lubricant 

Miscellaneous  supplies    

Miscellaneous  expense 

Millwright  repair  labor    

Millwright  repair  materials  . . . 
Machine  shop  repair  labor  . . . 
Machine  shop  rei:)air  expense  . 
Machine  shop  repair  materials 

Share  of  group  life  insurance 
Share  of  liability  insurance  . . . 

Total  direct  expense 

Share  of  insurance    

Share  of  taxes   

Share  of  depreciation 

Share  of  steam 

Share  of  heat,  light  and  power 


Total  screw  mach.  prod,  lahor  d:  exp. 


Setting  up  screw  machine  hours.  . . . 

Active  screw  machine  hours 

Per  cent  activity 

Cost  per  active  screw  machine  hour. 


19. 


Month  of 


Period  to 
Date 


COLLECTION  OF  EXPENSE  IN  COSTING         163 

Figure  53. — Specimen  Expense  Analysis  for  Selected  Departments 
OF  A  Machine  Shop  (Continued) 


Reamers  

Drills  

Belting   

Cutting  lubricant 


DRILL  press  department 


Foreman's  wages 


Miscellaneous  supplies    

Miscellaneous  expense   

Millwright  repair  labor    

Millwright  repair  materials  , . . 
Machine  shop  repair  labor  . . . 
Machine  shop  repair  expense  . 
Machine  shop  repair  materials 


Share  of  group  life  insurance   . 
Share  of  liability  insurance  . . . . 

Total  direct  expense 

Share  of  insurance   

Share  of  taxes   

Share  of  depreciation    

Share  of  steam   

Share  of  heat,  light  and  power 


Total  drill  press  department  expense. 
Total  drill  press  productive  labor. . . . 
Per  cent  expense  to  labor 


19. 


Month  of 


Period  to 
Date 


164 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  53. — Specimen  Expense  Analysis  for  Selected  Departments 
OF  A  Machine  Shop  (Continued) 


No.  24 


A 

B 

C 


K 
L 
M 
N 
O 
P 

Q 
R 

S 
T 
U 
V 

w 

X 

Y 

Z 

AA 

BB 

CC 

DD 

EE 

FF 

GG 

HH 

II 

JJ 

KK 

LL 

MM 

NN 

00 


WW 

XX 

YY 

ZZ 

AAA 


Miscellaneous  supplies    

Miscellaneous  expense 

Millwright  repair  labor    

Millwright  repair  materials  . . . 
Machine  shop  repair  labor  . . . 
Machine  shop  repair  expense  . 
Machine  shop  repair  materials 


GROUP  A   MILLING  MACHINES 


Foreman's  wages 


Share  of  liability  insurance 

Total  direct  expense  

Share  of  taxes   

Share  of  insurance   

Share  of  depreciation 

Share  of  heat,  light  and  power  . . . 
Share  of  general  factory 

Total  indirect  expense 

Total  Group  A  milling  machine  expense 

Total  Group  A  milling  mach.  prod.  lab. 

Per  cent  expense  to  labor 


19.. 


Month  of 


Period  to 
Date 


COLLECTION  OF  EXPENSE  IN  COSTING         165 

In  Chapters  IX  and  XI  a  complete  expense  analysis  for 
a  cutlery  plant  is  presented  and  its  connection  with  the 
books  and  current  statements  described  in  full. 

Consultation  of  these  specimen  analyses  will  perhaps 
convey  a  better  idea  of  the  method  of  expense  accumu- 
lation than  all  of  the  text.  The  indirect  labor  is  taken 
from  the  Payroll  Distribution,  each  item  coded  with  its 
index  symbol.  The  supplies  are  similarly  taken  from 
the  Supply  Requisition  Distribution,  also  coded  to  facili- 
tate correct  entry  into  expense.  The  items  of  expense 
from  the  Voucher  Register  also  have  the  charge  symbol 
attached  (Figure  8  in  Chapter  IV).  This  leaves  the  con- 
tingent or  accrued  items,  such  as  insurance,  taxes,  re- 
serves for  depreciation,  and  maintenance  and  interest. 
Taxes  and  insurance  are  of  several  kinds  and  are  han- 
dled in  costs  accordingly.  Taxes  in  connection  with  ex- 
pense are  limited  to  those  forms  which  are  permissible 
items  in  expense  and  which  exclude  therefore  Federal  or 
state  income  taxes.  Specifically  they  include  taxes  on 
real  estate  and,  in  some  states,  on  equipment.  Insurance 
covers  fire  and  special  liability  or  explosion  insurance 
on  boilers,  engines,  and  flywheels,  compensation,  and 
group  life. 

Taxes  and  fire  insurance  are  regarded  as  partly 
equivalent  to  rent  and  are  charged  to  the  departments 
on  the  basis  of  the  square  feet  in  each  department.  In 
order  to  effect  this  an  estimate  must  be  made  of  the 
amount  of  taxes  and  the  amount  of  fire  insurance  pre- 
miums due  in  the  year.  When  this  is  determined  the 
amount  is  prorated  to  the  departments  according  to  the 
area  of  each  and  a  monthly  quota  set  for  each  depart- 
ment. Sometimes  part  of  the  fire  insurance  is  charged 
into  the  material  or  stock  department,  as  an  element  of 
expense  of  handling  material  and  charged  into  costs 


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COLLECTION  OF  EXPENSE  IN  COSTING         167 

either  on  material  purchases  or  issues.  Premiums  on 
special  explosion  insurance  and  liability  insurance  on 
boiler,  engine,  and  flywheel  are  direct  charges  to  the 
heat,  light,  and  power  department,  of  course  after  being 
reduced  to  a  monthly  basis. 

Employees'  liability,  or  compensation,  insurance  is 
charged  directly  to  each  department  according  to  its 
estimated  cost  based  on  the  payroll  of  the  employees  in 
each  department.  The  rate  for  the  compensation  insur- 
ance is  determined  per  dollar  of  payroll  and  an  analysis 
of  the  payroll  by  departments  is  used  to  compute  the 
premium  cost  for  the  different  departments.  Group  life 
insurance  is  handled  in  almost  identical  manner.  It  is 
also  desirable  to  have  these  different  forms  of  insurance 
carried  on  separate  lines  in  the  Expense  Analysis  and 
controlled  by  separate  ledger  accounts  as  described  later. 

Depreciation. — Depreciation  is  an  expense  which  is 
often  neglected  and  much  misunderstood.  It  is  a  contin- 
gent item  really  in  the  nature  of  a  speculation  as  to  what 
term  of  useful  life  may  be  granted  to  any  part  of  the 
fixed  investment  under  the  vicissitudes  of  wear  and  tear 
and  obsolescence. 

Calculation  of  Fixed  Charges.— The  theories  and  sys- 
tems of  depreciation  and  the  methods  of  calculation  with 
those  pertaining  to  reserves  for  maintenance  will  be  the 
exclusive  topic  of  the  succeeding  chapter.  Immediate 
discussion  is  limited  to  the  disposition  in  expense  of  the 
gross  amounts  of  depreciation,  maintenance  reserves, 
and  interest  once  they  are  established  and  admitted  into 
expense.  Depreciation  on  buildings  is  apportioned  to 
departments  according  to  the  square  feet  of  floor  area 
and  handled  in  this  respect  identically  as  fire  insurance 
or  taxes.  Depreciation  on  equipment  is  charged  into 
departmental  expenses  on  the  basis  of  the  invested  value 


168  ESSENTIALS  OF  INDUSTRIAL  COSTING 

in  each.  Interest  on  investment,  if  admitted  into  costs, 
is  distributed  over  expense  on  value  subsequently  to  de- 
partments on  square  feet  for  building,  but  entirely  on 
value  for  equipment.  Fixed  charges  is  the  customary 
term  for  the  taxes,  fire  insurance  and  depreciation,  and 
the  basis  of  their  apportionment  in  costs  should  be  placed 
on  permanent  record  and  may  be  derived  by  the  use  of 
a  form  such  as  the  one  shown  in  Figure  54. 

Reserves  for  Replacement. — Reserves  for  maintenance 
or  replacement  are  determined  by  investigation  of  the 
frequency  with  which  the  necessity  which  they  represent 
arises.  Furnace  linings,  large  grindstones,  etc.,  wear 
out  rapidly  and  generally  in  direct  relation  to  a  certain 
amount  of  production.  The  cost  of  the  replacement  may 
be  secured  from  past  records  or  by  estimate  and  when 
the  periods  of  replacement  are  determined  it  is  a  simple 
affair  to  establish  what  monthly  installments  must  be  set 
up  in  order  to  build  a  reserve  to  meet  the  replacements 
when  they  occur.  Of  course,  the  object  in  doing  such  a 
thing  is  to  equalize  a  considerable  factor  in  expense 
which,  if  not  handled  in  this  manner,  might  load  unduly 
the  costs  at  one  time  and  undercompute  at  other  times. 

The  collection  of  expense  has  but  one  purpose  and  that 
is  to  attach  to  the  cost  of  production  an  equitable  share 
of  the  expense  incurred  by  the  production.  If  this  funda- 
mental axiom  can  be  grasped,  success  in  costing  expense 
is  then  only  a  matter  of  common  sense  in  setting  the 
extremes  of  effort  with  which  to  accomplish  the  best 
results  consistent  with  the  economies  of  the  given 
situation. 


CHAPTER  VIII 

THE   COSTING   OF   DEPRECIATION,   INTEREST,    AND   POWER 

The  need  of  making  proper  provision  for  depreciation  is  more  im- 
perative to-day  than  ever  before. — Hurley. 

The  question  of  whether  interest  on  the  capital  invested  is  a  proper 
charge  against  cost  of  production  is  one  on  which  there  is  marked  differ- 
ence of  opinion. — Federal  Trade  Commission. 

The  problem  of  the  cost  of  power  necessitates  the  application  of  sev- 
eral branches  of  exact  science  for  its  solution. — Gould. 

Depreciation.— By  depreciation  is  signified  the  con- 
tingency whereby  equipment  or  plant  investment  may 
either  be  rendered  useless  or  have  its  value  impaired  by 
various  agencies,  which  the  consensus  of  authorities 
define  as : 

"Wear  and  tear 
Deferred  maintenance 
Age  or  decrepitude 
Obsolescence 

Inadequacy  or  supersession 
Decline  in  market  value 

The  broad  distinction  between  these  activating  causes 
for  depreciation  has  been  made  as  physical  and  func- 
tional. Physical  depreciation  refers  to  the  tangible  con- 
dition of  property  as  effected  by  the  destructive  tenden- 
cies of  actual  usage  or  of  neglect,  etc.  Functional  depre- 
ciation describes  the  intangible,  but  nevertheless  real, 
diminution  in  value  as  occasioned  by  the  circumstances 
of  obsolescence,  inadequacy,  or  decline  in  market  value. 
The  distinction  between  the  several  agencies  of  depre- 

169 


170  ESSENTIALS  OF  INDUSTRIAL  COSTING 

ciation  are  finely  drawn,  but  the  essential  meaning  of  the 
terms  employed  are  as  follows: 

Wear  aixd  tear  is  the  physical  effect  of  actual  usage. 

Deferred  mmyite nance  is  an  euphonious  synonym  for  neglect 
or  insufficient  maintenance. 

Age  or  decrepitude  is  the  loss  in  physical  structure  and  integ- 
rity concurrent  with  time  and  independent  of  usage  and 
is  the  inexorable  consequence  of  mere  existence. 

Obsolescence  refers  to  the  circumstance  whereby  mechanical, 
technical,  or  trading  advances  or  changes  may  depreciate 
original  value  or  destroy  it  in  toto. 

Inadequacy  or  supersessiwi  differs  from  obsolescence  in  that  it 
refers  to  the  specific  contingency  that  growth  or  change 
in  the  character  of  the  manufacture  may  result  in  super- 
session of  the  plant  or  equipment  which  otherwise  is  ade- 
quate. 

Decline  in  market  values  is  a  possibility  of  frequent  realiza- 
tion. It  refers  to  the  possibility  of  reduction  in  purchase 
cost  of  equipment  from  that  obtaining  at  time  of  original 
installation. 


Frankly  I  am  not  at  all  persuaded  of  the  practical 
usefulness  of  the  definitions  just  given,  for  while  the  con- 
tingencies which  they  describe  may  occur,  the  extent  and 
exact  measure  of  each  cannot  be  foretold.  The  only  prac- 
tical expedient  is  to  recognize  in  each  of  the  causes  a 
possibility  which  may  develop  and  to  provide  a  collec- 
tive reserve  of  sufficient  proportions  to  meet  any  even- 
tuality. This  can  be  done  best  by  consulting  the  com- 
bined experience  within  an  industry  or  within  allied 
industries.  Tables  of  expected  life  or  rates  of  deprecia- 
tion have  been  established  by  many  groups  of  manu- 
facturers and  as  illustration  I  am  presenting  such  tabu- 
lations in  Figures  55  and  56, 


DEPRECIATION,  INTEREST,  AND  POWER         171 

Figure  55. — Standard  Depreciation  Rates  fob  Factory  Buildings 

AND  Equipment 

A  meeting  of  manufacturers  of  conveyors  and  elevators,  Chicago,  Feb- 
ruary 25,  1916,  called  to  draw  up  an  agreement  on  some  standardized  form 
of  accounting  procedure,  established  the  following  depreciation  standards. 
Reproduced  from  the  Iron  Age  of  November  30,  1916. 


Buildings  and  Accessories 

Reinforced  concrete  or  steel  and  tile 

Brick  and  steel  with  non-eonibustile  roof  and 
concrete  floors   

Brick,  steel  and  wood 

Brick  and  wood 

Steel  frame,  wooden  roof  and  corrugated  iron 
walls 

Steel  frame,  non-combustile  roof  and  corru- 
gated iron  walls 

Concrete  block,  with  wooden  roofs  and  floors. 

All  wood  structures,  well  built  (20  years)   . 

All  wood  structures,  cheap  (20  years)    .... 

Sprinkler  system  (20  years) 

Heating  and  ventilating  system  (20  years) 

Water  and  sewer  piping  and  sanitary  fixtures 
(where  separate)   

Tanks  and  reservoirs,  steel 

Tanks  and  reservoirs,  wood  (10  years)   

Note:  All  repairs  and  maintenance  to  be 
charged  to  account  8059. 

Machinery  and  Large  Equipment 

Boilers,  pumps,  feedwater  heaters  and  air 
compressors    

Switchboards,  main  wiring  and  conduit  .... 

Power  piping 

Engines  and  dynamos 

Machinery,  motors,  machine  tools,  traveling 
cranes,  etc 

Punch  presses,  bending  rolls,  power  shears 
and  drop  hammers 

Machine  tool  accessories — boring  bars,  drivers' 
key  seating  broaches,  etc.  (all  renewals  to 
repairs)   

Cupolas,  converters,  melting  furnaces  and  ac- 
cessories     

Annealing  and  heating  furnaces,  ovens,  forges, 
etc 


Per   Cent 

on  Cost 


2.5 

3 

3 

3.5 

3 

3.5 

4.5 

5 

4 

4 

4 

4.5 

9 


6 
6 
6 
5 

4.5 

4.5 


Per   Cent 

on 
Reducing 
Balance 


50 
5 
5 


4 
5 
5 

7 

6 

8 
10 
12 

7.5 

7.5 

7.5 
10 
20 


15 
15 
15 
10 

10 

10 


10 

10 


172 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  55. — Standard  Depreciation  Rates  for  Factory  Buildings 
AND  Equipment  {Continued) 


Machinery  and  Large  Equipment 

Motor  trucks    

Storage  battery  locomotives  (battery  renewals 
to  repairs)   

Horses  and  wagons 

Steel  shelving,  lockers,  etc 

For  items  below  a  single  write-off  at  the 
rates  specified  is  made  and  the  balance 
carried  as  a  part  of  the  inventory  with- 
out further  reduction.  Only  items  ac- 
tively used  in  fabricating  standard  prod- 
uct and  described  in  schedule  as  net 
items,  should  be  so  treated,  all  other 
items  being  charged  off  wholly  to  ex- 
pense. 

Small  Tools 

For  machines,  net  additions  

Hand  tools,  net  additions 

Punches  and  dies  (Standard)  net  additions.. 

Chills,   iron   and   steel   flasks   and   accessories 

(net  additions)  


Fixtures,  Furniture  and  Miscellaneous 
Equipment 

Mechanical  appliances,  net  additions 

Departmental  wiring  and  electric  fixtures,  net 

additions   

Miscellaneous  items  (wood)  net  additions  . . 

Patterns  (Standard) 

Metal,  net  additions   

Wood,  net  additions 

All  patterns  required  for  a  particular  order 
or  contract  to  be  charged  to  the  job. 

Drawings 
All  new  standard  drawings  to  be  charged  to 
expense.     All   drawings  required   for  a 
particular     order     or     contract    to     be 
charged  to  the  job. 

Miscellaneous  Beal  Estate  Improvements 
Pavements,  sidewalks,  fences,  retaining  walls, 
roadways,    tracks,    yard    drainage,    general 
conduits,  tunnels,  vaults,  etc 


Per   Cent 
on  Cost 


Per   Cent 

on 
Reducing 
Balance 


20 

10 

12 

5 


50 
50 
50 

50 


60 

60 
70 


100 


60 

30 
35 
12 


4.5 


10 


DEPRECIATION,  INTEREST,  AND  POWER        173 

FiGUKE  56. — Standardized  Ac?counting  and  Cost  System  for  the 
Electrical  Manufacturing  Industry, 


APPENDIX  A 

determination  and  application  of  rates  for  depreciating  manufac- 
turing PLANT  accounts 

General 

1.  All  rates  are  to  be  applied  to  first  cost. 

2.  The  rates  recommended  are  those  which  are  to  be  applied  to  first 
costs  to  obtain  amount  to  be  included  in  costs  and  estimated  costs, 
and  are  in  addition  to  maintenance  expenditures  and  renewals  as 
provided  for  in  indirect  manufacturing  expense  accounts. 

3.  All  rates  recommended  are  based  on  normal  operating  conditions. 
In  case  of  a  factory  working  overtime  and  with  night  shifts  for  any 
appreciable  length  of  time,  or  under  other  extraordinary  conditions, 
higher  rates  should  be  assessed  so  as  to  absorb  in  the  costs  during 
the  period  of  extraordinary  activity: 

1.  The  abnormal  physical  exhaustion. 

2.  The  abnormal  primary  cost  of  equipment. 

3.  The  cost  of  equipment  estimated  to  be  surplus  in  normal  times. 

4.  Rates  recommended  are  to  be  applied  to  the  items  shown  in  the 
further  subdivisions  of  the  manual. 

A.    La/nd 

Kate 
Recommended 

a.    1.    Land — purchasing  price 0      per  cent 

2.     Land — grading  and  improvements 0      per  cent 

B.    Buildings 
a.     1.    Buildings  (total  resen'e  75  per  cent) : 

1.1  Wooden  buildings  and  sheds 10  per  cent 

1.2  Corrugated  iron  buildings  10  per  cent 

1.3  Brick  and  wood  (mill  construction) .     5  per  cent 

1.4  Brick  and  steel  (fireproof  construc- 
tion)         3  per  cent 

1.5  Reinforced  concrete   (fireproof  con- 

struction)     3      per  cent 

Note:  In  those  cases  where  plant  accounts 
include  accessories,  care  should  be  taken 
to  segregate  such  accessories,  in  order 
that  the  proper  rates  of  depreciation 
may  be  applied. 


174  ESSENTIALS  OF  INDUSTRIAL  COSTING 

Figure  56. — Standardized  Accountixg  and  Cost  System  for  the 
ELEcrraiCAii  Manufacturing  Industry  {Continued) 

b.  Structures  (total  reserve  90  per  cent)  : 

1.  Structures   121/2  per  cent 

2.  Water,    drainage    and    sewer    pipes 

(outside)    6       per  cent 

3.     Piping  and   electrical   conductors 

(outside)    6      per  cent 

c.  Sprinkler  system  (total  resen'e  90  per  cent)  ....  12i/^  per  cent 

d.  1.     Heating  and  ventilating   (total  reserve  90  per 

cent)    5      per  cent 

2.  Other  inside  piping  and  wiring   (total  reserve 

90  per  cent)   5      per  cent 

C.     Machinery  and  Tools 
a.     1.    Machinery  (total  reserve  90  per  cent) : 

1.1  Special  machinery.  ...7y2  per  cent  to  90      per  cent 

Rates  on  special  machinery  depend  upon  the 
estimated  period  of  present  use  and 
their  adaptability  for  other  use. 

1.2  Standard  machinery.  .71/^  per  cent  to  10       per  cent 

a.  2.     Electrical  apparatus  (total  reserve  90  per  cent) 

714  per  cent  to  10       per  cent 

3.  Ovens  and  furnaces  (total  resen'e  90  per  cent) .  10      per  cent 

4.  Power  plant  equipment    (total  reser\-e  90   per 

cent)    TYz  per  cent 

b.  1.     Foundations  for  machinery  and  apparatus  (total 

reserve  100  per  cent)   12^/2  per  cent 

2.     Installation  of  machinery'  (total  reser\-e  100  per 

cent)    I2V2  per  cent 

Years  to  be 
Applied 

c.  1.     •Semi-durable  tools  (total  reserve  100  per  cent) 

25  per  cent  on  each  year's  expenditure 4 

Set  up  on  the  books  an  estimated  value 
equivalent  to  the  additions  to  the  ac- 
count during  the  last  four  years. 

2.  *Electrical    equipment    (total    reserve   100    per 

cent)  16^  per  cent  on  each  year's  expenditures.  6 

3.  *Moulds,   jigs,   punches,   dies   and   special   ma- 
chinery  (total  reserve  100  per  cent)   33^^  per 

cent  on  each  year's  expenditures 3 

4.  *Metal  flasks  (total  reserve  100  per  cent) 


DEPRECIATION,  INTEREST,  AND  POWER         175 

Figure  56. — Standardized  Accounting  and  Cost  System  for  the 
Electrical  Manufacturing  Industry  (Continued) 

Inasmuch  as  all  foundries  have  their  proper 
equipment  of  metal  flasks,  the  cost  of 
making  all  metal  flasks  is  to  be  charged 
to  indirect  expense  account  No.  460. 
When  flasks  are  scrapped,  the  scrap 
value  will  be  credited  to  indirect  ex- 
pense account  No.  460.  The  difference 
between  the  inventory  at  scrap  value  at 
the  beginning  and  end  of  the  year  will 
be  taken  in  the  expense  account.  There 
will,  therefore,  be  no  depreciation  on 
this  item. 

D.     Patterns  and  Drawings  (total  reserve  100  per  cent) 

a.  *Patterns  333^  per  cent  on  each  year's  expendi- 
tures    3 

b.  Drawings 

Set  up  on  books  estimated  or  appraisal 
value.  Expenditures  chargeable  to  de- 
velopment or  shop  supplies  account  No. 
240. 

E.     Furniture,  Fixtures  and  Appliances  (total  reserve  100  per  cent) 
a.  *Furniture  and  fixtures  in 


20  per  cent  on  each 
year's  expenditures.. 


shops 

h.  *Furniture     and      appli- 

ances in  factory  offices 

c.  *Fire   protective  appara- 

tus 

From  a  valuation  viewpoint,  it  is  recommended 
that  100  per  cent  reserve  be  set  aside. 

F.     Other  Equipment  (total  reserve  90  per  cent) 

Rate 
Recommended 
a.     1.     Railway    tracks    and    overhead    equipment,    re- 
newals and  repairs  charged  to  operating  expense  None 

2.  Rolling  stock 3  to     6  per  cent 

3.  Automobile  and  other  conveyances 25  per  cent 

Property  Other  Than  Manufacturing  Plants 

The  rates  recommended  are  those  that  would  be  applied  for  similar 
items  for  manufacturing  plant  items.  In  case  items  are  dissimilar 
rates  should  be  applied  consistent  with  those  used  for  manufacturing 
plant  items. 

*  Set  up  on  the  books  a  value  obtained  by  inventory  where  practicable. 
Where  this  method  is  impracticable,  a  value  should  be  set  up  on  basis  of 
previous  years'  additions,  the  number  of  such  years  being  dependent  upon 
the  varying  circumstances. 


176  ESSENTIALS  OF  INDUSTRIAL  COSTING 

Methods  of  Calculation.— The  calculation  of  deprecia- 
tion, once  the  rate  is  established,  may  be  made  in  various 
ways  which  are  known  as  follows : 

1.  Straight  line  or  equal  installment  method 

2.  The  increasing  installment  method 

3.  The  decreasing  installment  method 

4.  The  interest  or  sinking  fund  and  annuity  method 

The  straight  line  method  sets  up  an  equal  annual 
amount  disregarding  the  element  of  repairs  on  the 
assumption  that  a  machine  of  uniform  producing  ca- 
pacity through  the  years  should  be  charged  into  costs 
with  similar  uniformity. 

The  increasing  installment  method  rests  on  the  as- 
sumption that  the  process  of  depreciation  goes  on  at  a 
variable  rate,  increasing  as  a  function  of  time  and  that 
reserve  should  be  proportioned  upward  through  the 
years. 

The  decreasing  installment  method  also  assumes  the 
geometric  progression  of  depreciation,  but  maintains  that 
this  condition  necessitates  offsetting  repair  expenditures 
of  increasing  amounts  with  age  and  asserts  that  the 
depreciation  installment  should  diminish  therefore  with 
age  in  order  to  equate  the  combined  annual  cost  of  up- 
keep and  depreciation. 

The  interest  method  considers  the  depreciation  reserve 
as  a  fund  properly  subject  to  compound  interest  and  com- 
putes an  annual  installment  which,  with  accumulated 
interest  through  the  years,  establishes  an  adequate 
reserve. 

The  use  of  any  of  these  methods  is  optional.  The 
straight  line  method  has  the  advantage  of  simplicity  in 
principle  and  calculation  and  may  be  used  securely  in 
most  cases.    It  operates  by  deducting  the  salvage  value 


DEPRECIATION,  INTEREST,  AND  POWER        177 

or  equipment  from  the  original  capital  value  and  divid- 
ing this  difference  by  the  estimated  life,  thus  establish- 
ing equal  annual  installation.  As  an  example,  assume  a 
machine  installation  cost  of  $7,000.00,  the  salvage  value 
as  $700.00,  and  the  life  as  10  years.  The  straight  line 
depreciation  would  be : 

$7,000.00  —  $700.00 

=    $630.00  per  year 

10 


DetctiiitiOD 
Uaker 

EXJUIRMENT 

INVE74TORY 

Machine  Na 
LocadoD 

SiM                                                                qoaltty 

^uchaaed  fnttt 
Date  of  PuKhaw 

Purcbaae  PMce 
Fidgbl 
Installation 

Appunenance 
Total  Coet 

DEPRECIATION 

1 

•Vmmr 

Ajnount 

Y«r 

■r,^ 

Amount 

Y«r 

Anwunt      Q  Year 

Amount         | 

Figure  57. — equipment  inventory 


An  excellent  plan  is  to  keep  an  equipment  inventory 
record  showing  full  data  as  to  cost  of  installation  of  indi- 
vidual machines  with  the  annual  installments  for  depre- 
ciation noted  thereon  (Figure  57),  and  it  is  needless, 
perhaps,  to  add  that  in  modem  accounting  depreciation 
is  carried  in  a  separate  reserve  account,  not  credited  to 
the  actual  equipment  accounts. 

Much  has  been  written  about  the  various  methods  of 
calculation,  the  relative  advantages  of  which  are  often 
asserted  with  a  vigor  which  in  my  opinion  may  easily  be 
misspent.    It  must  be  remembered  that  at  best  deprecia- 


178  ESSENTIALS  OF  INDUSTRIAL  COSTING 

tion  is  an  estimate  and  that  while  experience  has  de- 
veloped tables  of  reasonable  accuracy,  they  compare  very 
much  with  the  mortality  tables  by  which  the  expectation 
of  human  life  is  computed,  in  that  they  are  apt  to  err 
seriously  in  the  individual  case  and  at  best  are  conjec- 
tural. However,  with  full  admission  of  the  uncertainty 
of  depreciation,  monthly  provision  for  it  in  costs  is  indis- 
pensable to  accuracy  and  from  a  banking  viewpoint  the 
appearance  of  a  depreciation  reserve  on  the  balance  sheet 
in  adequate  amount  is  a  matter  of  plain  business  in- 
tegrity. For  depreciation  is  the  reserve  against  that 
loss  in  invested  value  which  cannot  be  restored  by  repairs 
or  maintenance.  The  actual  occurrence  of  this  loss  in 
value  is  beyond  dispute  and  is  a  consequence  of  either 
use  or  disuse.  The  stockholders  or  owner  who  have 
lightened  depreciation  below  a  conservative  allowance 
in  order  to  enhance  the  apparent  profit  are,  as  some  one 
has  said,  virtually  attaching  a  gratuitous  piece  of  the 
plant  to  each  article  of  production  sold.  As  illustration 
of  the  unsound  practice  in  regard  to  depreciation  in  the 
past  and  of  the  urgency  of  proper  provision  for  it  in 
costs,  the  following  comments  by  E.  M.  Hurley  are 
quoted : 

Importance  of  Depreciation. — Some  years  ago  the  prac- 
tice among  those  who  realized  the  necessity  for  making  pro- 
vision for  depreciation  of  plant  equipment  was  to  make  a 
charge  to  profit  and  loss  at  the  end  of  the  year.  This 
plan  might  at  that  time  have  answered  the  purpose  if  it 
had  been  carried  out,  but  many  manufacturers  would  look 
at  the  profit  and  loss  statement  before  making  this  charge  and, 
if  the  year  had  not  been  a  particularly  profitable  one,  they  would 
reduce  the  amount  of  the  charge  or  even  eliminate  it  altogether, 
expecting  to  make  it  up  the  following  year.  The  inevitable  re- 
sult was  that  the  amount  set  aside  for  depreciation  fell  short  of 
the  proper  percentage.  Conditions  to-day  demand  that  depre- 
ciation be  recognized  as  an  element  of  cost  and  that  provision  be 
made  each  month  to  include  it  in  the  costs  of  that  month.    If  a 


DEPRECIATION,  INTEREST,  AND  POWER        179 

machine  were  of  a  type  that  would  wear  out  in  a  month,  could 
any  one  say  that  the  entire  cost  of  that  machine  should  not  be 
paid  by  that  month 's  production  ?  The  fact  that  a  machine  may 
be  expected  to  last  for  ten  years  instead  of  a  month  is  no  reason 
why  every  month  of  those  years  should  not  pay  its  share  of  the 
cost  of  the  machine. 

Appreciation. — Appreciation  is  the  opposite  of  de- 
preciation and  means  the  gain  in  invested  value  which 
may  occur  with  time  and  use.  The  classic  example  in- 
evitably drawn  upon  to  illustrate  appreciation  is  the 
roadbed  of  a  railway,  which  does  improve  in  structural 
qualities  with  time.  In  manufacture,  omitting  the  factor 
of  land  values  which  are  frequently  enhanced,  there  are 
few  cases  of  appreciation.  However,  appreciation  in 
values  has  occurred  and  may  occur  and  our  interest  is  in 
what  the  procedure  for  handling  it  in  costs  should  be. 
This  may  be  answered  briefly  by  the  statement  that  con- 
servative financial  practice  does  not  recognize  apprecia- 
tion until  it  is  realized  by  transfer  or  sale.  Hence,  the 
influence  of  appreciation  on  cost  of  production  is  nil  until 
change  of  title  or  ownership  with  adjusted  book  values 
brings  appreciation  into  the  same  category  as  original 
machine  value. 

Interest.— The  question  whether  interest  is  or  is  not  a 
proper  or  a  necessary  factor  in  costs  comprises  a  legacy 
of  unsettled  dispute  which  can  only  be  approached  with 
due  sense  of  temerity  and  frank  admission  of  futility  in 
reconciling  the  opposing  views.  The  question  takes  its 
place  with  other  classic  arguments  which  have  engaged 
the  speculations  of  mankind  and  to  which  there  is  no 
final  answer  since  decision  rests  in  the  processes  of  opin- 
ion and  policy  and  not  within  the  canons  of  abstract  law 
or  principle.  It  is  difficult,  therefore,  to  satisfy  inquiry 
on  this  point  and  determine  judgment,  but  it  is  possible 
to  consider  the  broader  phases  of  the  question  and  pre- 


180         ESSENTIALS  OF  INDUSTRIAL  COSTING 

sent  both  ar^ments  in  presenting  individual  opinion 
whicli  will  be  done  herewith. 

Cost  is  a  term  which  means  the  accumulation  of  all 
expenditures  required  for  a  given  undertaking  and  the 
cost  plus  the  profit  must  be  contained  within  the  price 
of  a  commercial  transaction  if  the  actual  purpose  of  busi- 
ness is  to  be  achieved.  Profit  is  not  entirely  necessary, 
however,  because  the  low  limit  of  commercial  success  is 
measured  by  mere  solvency.  The  cost  must  be  such, 
therefore,  as  to  insure  solvency,  although,  of  course,  it 
could  not  long  continue  with  that  motive,  since  something 
beyond  a  breaking-even  is  required  in  business  and  profit 
must  be  contemplated  in  price.  But  the  point  is  made 
because  in  my  opinion  the  matter  of  solvency  versus 
profit  is  the  underhdng  distinction  which  influences  the 
proper  treatment  of  interest  in  cost.  Interest  in  cost  is 
a  financial  and  not  an  economic  consideration,  for,  from 
the  strictly  scientific  viewpoint  of  theoretical  economy, 
the  charge  of  capital  is  as  essentially  a  part  of  cost  as  the 
wage  of  labor  and  the  earnings  beyond  this  minimum 
charge  or  interest  are  profit.  These  earnings  constitute 
inducement  for  the  investment  and  the  basis  of  a  higher 
evaluation  of  the  capital.  In  a  word,  interest,  as  a  part 
of  cost,  is,  from  the  financial  viewpoint,  only  regarded 
as  necessary  when  its  exclusion  from  cost  would  precipi- 
tate insolvency. 

In  finance  bonds  are  regarded  as  heavy  burdens  and 
are  only  issued  as  a  last  resort  and  then  minimized  as 
far  as  possible.  The  history  of  industrial  finance  indi- 
cates a  fear  of  the  burden  of  interest,  and  an  escape 
therefrom  by  the  institution  of  preferred  stock  with  or 
without  cumulative  provisions.  Bonds  have  rarely  been 
initial  features  in  the  financial  organization  of  indus- 
trial enterprise  and  have  usually  been  issued  to  secure 


DEPRECIATION,  INTEREST,  AND  POWER         181 

additional  working  capital  or  to  meet  some  similar  strin- 
gency. In  fact,  before  the  war  the  trend  in  finance  was 
away  from  bonds  and  was  evolving  new  securities,  the 
purpose  of  which  was  to  secure  through  earnings  and  not 
on  assets  and  to  forestall  legal  action  in  case  of  default. 
Henderson  says  as  to  railroads : 

A  soundly  financed  railroad  will  try  to  keep  its  bonded  indebt- 
edness well  under  50  per  cent  of  its  capitalization.  Professor 
Ripley  believes  that  the  percentage  should  be  only  40.  The 
reason  is  elementary.  Net  incomes  will  necessarily  fluctuate 
much  from  year  to  year.  Bumper  crops,  industrial  and  com- 
mercial activitj^  and  fair  weather  will  bring  large  incomes ;  crop 
failures,  business  stagnation,  and  severe  storms  or  floods  will 
bring  small  incomes.  Now  interest  on  bonds  must  always  be 
met,  if  there  is  a  default  the  road  is  insolvent,  but  dividends  on 
stock  can  be  reduced  or  suspended  without  serious  consequences. 
The  amount  normally  paid  out  in  dividends  or  put  away  in  sur- 
plus is,  therefore,  the  margin  of  safety  which  separates  the  rail- 
road from  insolvency.  In  proportion  as  the  bond  issue,  with  its 
inescapable  fixed  charges  increases,  this  margin  of  safety  nar- 
rows and,  if  it  shrinks  beyond  a  certain  point,  there  is  constant 
danger  that  one  of  the  recurrent  periods  of  meager  earnings  will 
wipe  it  out  completely  and  throw  the  road  into  receivership. 

In  industry  the  fluctuations  in  earnings  are  wider  and 
hence  the  risk  of  interest  burden  proportionately  greater, 
so  bonds  are  rare  issues  and  interest,  therefore,  not  often 
a  compulsory  element  in  cost.  Summing  up,  this  dis- 
cussion is  intended  to  show  that  interest  is  only  a  neces- 
sary addition  to  cost  when  it  must  be  earned  to  prevent 
insolvency  and,  therefore,  need  only  cover  that  part  of 
the  invested  capital  that  is  in  bonds.  Business  enter- 
prise is  devoted  to  profit  and  not  to  a  bifocal  affair  of 
interest  and  profits.  A  cost  should  represent  the  base 
upon  which  price  must  be  erected  in  order  to  secure 
profit.  To  me  there  appears  no  convincing  reason  why 
interest  should  be  isolated  as  a  minimum  charge  of 
capital  and  included  in  costs.  Manifestly  the  only  pos- 
sible purpose  in  doing  so  would  be  either 


182  ESSENTIALS  OF  INDUSTRIAL  COSTING 

1.  To  assure  a  minimum  earning  on  capital  because 
no  price  could  be  lower  than  cost,  and,  if  cost  included 
interest,  the  earning  would  be  secure. 

2.  To  attain  greater  relative  accuracy  in  costs  of  dif- 
ferent articles  in  the  same  manufacture. 

Frankly,  in  my  opinion,  any  responsible  officer  who  is 
unable  to  operate  profitably  when  the  flat  costs  of  pro- 
duction are  known  without  interest  included  is  hardly 
fitted  to  his  post  and  for  this  reason  the  contention  of 
including  interest  in  costs  as  a  factor  of  safety  is  hardly 
complimentary  and,  in  the  opinion  of  many  executives, 
complicates  more  than  protects  price  administration. 

As  to  the  bearing  of  interest  on  costing  accuracy  the 
only  possible  connection  would  be  that  different  products 
of  the  same  comjDany  occupied  relatively  less  or  more 
capital  in  their  manufacture,  either  by  amount  or  time 
of  engagement  or  turnover,  and  hence  had  different  capi- 
tal costs.  This  circumstance  conceivably  might  exist,  but 
I  cannot  summon  up  one  concrete  example  where  the 
difference  in  capital  cost  affected  substantially  what 
should  have  been  the  margin  of  profit  on  two  different 
articles  within  the  same  company.  Of  course,  it  is  true  that 
the  turnover  of  invested  capital  varies  in  different  indus- 
tries. Probably  the  sales  of  the  average  corporation 
about  equal  the  capital  or  surplus.  In  some  industries 
the  ratio  may  be  five  to  one  instead  of  one  to  one,  and  in 
some  seven-tenths  to  one,  and  this  activity  of  invested 
capital  is  determined  by  the  nature  of  the  productive 
processes  and  the  credit  basis  of  distribution.  This 
fluctuation  in  capital  activity  is  offset  by  the  margin  of 
profit.  The  margin  is  greater  on  slow  turnovers  and 
less  on  fast  turnovers.  Thus  the  relative  activity  on 
capital  in  production  is  compensated  by  the  extent  of 
profit  and  the  rate  of  profit  for  a  given  industry  required 


DEPRECIATION,  INTEREST,  AND  POWER        183 

to  defray  the  cost  of  capital  is  set  accordingly.  But  this 
has  nothing  to  do  with  costs  whatsoever,  and  if  it  is 
argued  that  it  has,  then  costs  might  logically  be  held  to 
include  profit,  a  claim  not  held  by  any  one  to  my 
knowledge. 

Argument  for  including  interest  in  costs  frequently 
rests  on  the  comparative  cases  of  proprietary  and  tenant 
operation.  That  is,  in  the  case  of  a  company  renting  its 
buildings  versus  one  owning  its  buildings,  the  claim  is 
made  that,  since  rent  is  admitted  into  cost  containing,  as 
it  does,  interest  on  the  landlord's  investment,  interest  on 
buildings  owned  by  a  company  should  also  be  included 
in  costs.  Accepting  this  argument,  would  it  not  be 
equally  proper  to  charge  the  landlord's  profit  in  excess 
of  interest?  Further,  assume  cases  of  two  companies, 
one  with  a  repair  machine  shop  and  one  without.  The 
latter  company  pays  a  profit  to  a  jobbing  machine  shop 
for  all  repairs  and  properly  charges  the  expense  into 
costs.  Would  it  be  feasible  or  desirable  to  charge  costs 
in  the  case  of  the  first  shop  with  repairs  made  in  its  own 
machine  shop  at  a  profit?  I  must  again  dissent  from  this 
position  and  hold  that  these  examples  simply  sustain  the 
point  that  the  inclusion  of  interest  in  costs  is  entirely  a 
financial  consideration.  '  If,  through  lack  of  capital, 
money  is  borrowed,  or  if  a  building  is  rented  because 
none  is  owned,  the  interest  paid  is  the  penalty  of  capital 
insufficiency  and  a  tax  on  the  cost  of  doing  business,  but 
the  price  commanded  in  a  competitive  market  is  no 
greater  than  that  of  a.  company  capitalized  adequately 
and  which  earns  thereon  the  interest  that  the  other  com- 
pany has  to  pay  out.  This  can  hardly  be  said  to  justify 
the  inclusion  of  interest  in  all  costs  any  more  than  an 
equal  provision  for  bad  debts  should  be  made  in  all  com- 
panies regardless  of  their  credit  making  abilities. 


184  ESSENTIALS  OF  INDUSTRIAL  COSTING 

To  conclude,  it  is  conceded  that  in  theoretical  eco- 
nomics a  distinction  is  made  between  interest  and  profits, 
and  costs  are  considered  to  include  interest  with  profits 
abiding  beyond.  But  it  is  my  contention  that  theoretical 
economics  and  the  technique  of  business  practice  as  well 
as  the  laws  of  bankruptcy  differ  in  this  respect.  For 
business  and  commercial  law  regards  interest  as  a  cost 
only  when  it  must  be  earned  to  maintain  solvency. 

Further,  the  argument  that  greater  relative  accuracy 
is  secured  in  costs  by  including  interest  and  thus  reflect- 
ing the  difference  in  capital  engagement  seems  somewhat 
remote  from  actual  probability.  I  cannot  think  of  a 
concrete  instance  where  the  ratio  of  sales  volume  to  total 
capital  and  surplus  shows  any  two  products  within  the 
line  of  a  given  corporation  which  depart  widely  in  this 
same  ratio  for  their  particular  requirements.  To  explain 
this  point  assume  a  manufacture  where  every  dollar  of 
capital  and  surplus  produces  $1.50  of  sales  value  in  the 
year.  I  believe  it  doubtful  if  any  such  manufacture  might 
have  in  its  line  individual  articles  the  sales  on  which 
would  depart  very  far  from  this  average  of  one  to  one 
and  a  half.  Unless  there  was  a  great  departure  it  does 
not  appear  that  any  considerable  error  could  creep  into 
the  costs  of  these  products  if  the  factor  of  interest  were 
ignored. 

Heat,  Light,  and  Power.— The  provision  of  heat,  light, 
and  power  in  manufacture  is  a  primary  necessity  and 
the  machinery  whereby  it  is  done  is  governed  by  the 
technical  principles  of  engineering.  The  source  of  en- 
ergy  which  it  is  the  function  of  this  machinery  to  convert 
to  applicable  form  is  generally  coal,  occasionally  water 
and  sometimes  a  manufacturing  waste  such  as  sawdust 
or  bagasse.  The  proportion  of  energy  to  the  unit  of 
production  or  per  dollar  of  value  required  in  manufac- 


DEPRECIATION,  INTEREST,  AND  POWER        185 

ture  varies  tremendously  with  the  character  of  the 
product. 

Paper  mills  and  glass  factories  are  industries  in  which 
great  quantities  of  energy  are  demanded  both  for  heat 
and  for  power.  A  paper  mill  axiom  holds  that  "a  pound 
of  paper  requires  a  pound  of  coal,"  and  although  this 
proportion  has  been  bettered  in  modern  engineering  prac- 
tice, the  relation  has  never  been  reduced  below  0.7  of  a 
pound  of  coal  to  a  pound  of  paper.  Glass  plants  invari- 
ably are  located  in  natural  gas  centers  or  near  good  gas 
coal,  because  the  requirements  for  heat  are  very  great 
and  the  consumption  of  gas  per  unit  of  product  is  large. 
In  fact,  the  heat  factor  is  so  prominent  in  cost  in  these 
two  industries  that  it  is  doubtful  if  competition  could  be 
developed  against  proximity  to  a  relatively  cheaper  fuel 
source. 

In  general,  in  manufacture  the  provision  of  energy 
either  in  the  form  of  heat  or  power  is  not  such  a  vital 
factor  in  production,  nor  is  it  so  prominent  an  element 
in  expense.  For  in  industry  by  and  large  the  entire 
cost  of  power  and  heat  probably  does  not  exceed  one 
to  seven  per  cent  of  total  expense  with  a  fair  average 
of  four  per  cent.  The  comparatively  minor  aspect  of 
this  factor  in  expense  has  resulted  in  the  past  in  disre- 
gard of  its  possibilities  in  the  pursuit  of  economy  and  a 
slighting  of  effort  to  apportion  it  accurately  in  costs. 
With  the  passing  of  time  and  the  closer  scrutiny  of  all 
elements  of  cost  and  the  sharp  rise  in  the  price  of  coal, 
the  matter  of  heat  and  power  have  received  increasing 
attention  both  in  regard  to  technical  betterments  and 
application  in  costs.  Accurate  accumulation  of  the  cost 
of  heat  and  power  and  its  proper  distribution  in  costs 
involve  the  principles  of  engineering  more  than  account- 
ting  and  at  least  an  elementary  understanding  of  the 


186  ESSENTIALS  OF  INDUSTRIAL  COSTING 

technical  side  of  the  subject  should  be  acquired  if  suc- 
cess in  this  phase  of  costing  is  to  be  attained.  Manufac- 
ture presents  a  demand  for  power  and  light  and  heat  in 
proportion  and  in  amounts  conditioned  by  the  nature  of 
the  processes  and  the  product.  Heat  is  usually  supplied 
from  steam,  although  often  directly  from  gas,  coal,  or 
coke.  Light  in  modem  plants  is  supplied  by  electricity, 
although  in  rare  instances  by  gas.  Power  is  generated 
from  coal  or  fuel  oil,  or  from  the  fall  of  water.  It  is 
produced  in  the  form  of  motion  by  the  internal  combus- 
tion engine,  steam  engine,  or  turbine  or  water  wheels. 
Power  thus  generated  is  transmitted  by  belts  and  shaft- 
ing and  pulleys  to  the  driving  of  machinery  or  converted 
into  electricity  and  applied  by  motors  either  for  groups 
of  machines  or  indi^^dually.  In  rare  cases  water  power 
is  similarly  applied  directly  to  machiner5^  The  power 
requirements  for  different  industries  per  employee,  per 
$1,000  capital,  and  per  $1,000  of  value  of  product  is  listed 
in  the  interesting  tabulation  (Figure  58)  taken  from  an 
article  by  H.  E.  McKensit  in  the  Canadian  Engineer. 
The  power  is  supplied  as  follows ; 

Steam  engines  or  turbines 70  per  cent 

Internal  combustion  engines 5  per  cent 

AYater  wheels 8  per  cent 

Rented  from  central  stations 17  per  cent 

The  power  thus  supplied  is  expended  in  driving  ma- 
chinery, either  by  line  shafting  or  motors.  The  propor- 
tion of  each  follows: 

Motor  drives 22  per  cent 

Shaft  drives 78  per  cent 

Coal  is  the  leading  fuel  used  Avith  coke,  oil,  and  gas  of 
secondary  importance  in  amount.  Coal  is  a  mineral  con- 
taining certain  elements,  chiefly  carbon,  which  when  oxi- 


DEPRECIATION,  INTEREST,  AND  POWER         187 

Figure  58. — Relative  Position  of  Industries  as  Power  Users 


Horse  Power 

Relative 

2 

Per  $1,000 
Capita 

3 

Per  $1,000 
Value  of 
Product 

Use  of 

Industry 

1 
Per  Capita 

Power 

Average  of 

1,  2.  3 

1.  Clothing 

0.14 

0.16 

0.07 

0.12 

2.  Boots  and  shoes . . 

0.45 

0.43 

0.19 

0.36 

3.  Canning  and  pre- 

serving    

1.13 
1.92 

0.68 
0.55 

0.52 
0.02 

0.78 

4.  Meat  packing 

0.82 

5.  Foundries  and  ma- 

chine shops 

1.40 

0.57 

0.71 

0.89 

6.  Farm  implements. 

1.66 

0.39 

0.68 

0.91 

7.  Car  shops,  railroad 

0.98 

1.23 

0.72 

0.98 

8.  Carriages    and 

wagons  

1.52 

0.72 

0.79 

1.01 

9.  Paints    and    var- 

nishes    

2.55 
1.54 

0.56 
0.98 

0.45 
0.93 

1.13 

10.  Furniture   

1.15 

11.  Electrical  machin- 

ery and  apparatus 

1.51 

0.60 

1.41 

1.17 

12.  Woolen  mills 

2.07 

0.84 

0.83 

1.25 

13.  Smelting,  lead 

3.45 

0.20 

0.16 

1.33 

14.  Creameries 

3.22 

1.42 

0.37 

1.67 

15.  Petroleum  refining 

5.45 

0.50 

0.38 

2.11 

16.  Breweries 

5.20 

0.56 

0.93 

2.23 

17.  Cotton  mills 

3.35 

1.58 

2.06 

2.33 

18.  Giindstones 

3.72 

1.16 

3.38 

2.75 

19.  Lumber,   saw   and 

planing  mills 

3.62 

2.51 

2.46 

2.86 

20.  Bricks  and  tiles . . 

3.99 

1.95 

3.68 

3.21 

21.  Chemicals   

7.50 

1.34 

1.77 

3.54 

22.  Smelting  copper. . 

9.40 

1.42 

0.42 

3.75 

23.  Iron  and  steel  roll- 

ing mills 

8.1 

2.09 

2.13 

4.11 

24.  Sugar     and     mo- 

lasses   

10.70 
9.00 

1.05 
2.11 

0.58 
1.30 

4.11 

25.  Oil  and  cottonseed 

4.14 

26.  Flour     and     grist 

mills 

12.90 
12.6 

2.44 
1.98 

0.97 
5.9 

5.68 

27.  Portland  cement. . 

6.83 

28.  Paper    and    wood 

t)u1d 

16.0 
27.2 

3.19 
2.41 

4.86 
3.00 

8.02 

ir^  IT     ••••••• 

29.  Blast  furnaces 

10.87 

30.  Carbide  of  calcium 

37.4 

12.1 

14.5 

21.3 

188  ESSENTIALS  OF  INDUSTRIAL  COSTING 

dized  or  burnt  give  off  heat.  The  combustion  takes  place 
in  the  firebox  of  the  boiler  and  the  hot  gases  convey  the 
heat  to  water,  transforming  it  into  steam.  The  value  of 
coal  is  measured  by  its  content  in  heat  units  or  B.t.u. ; 
the  efficiency  of  combustion  is  measured  by  the  per  cent 
of  these  units  which  are  absorbed  by  the  forming  of 
steam.  The  average  bituminous  coal  contains  12,000  to 
13,500  B.t.u.  per  pound.  The  small  industrial  boiler  ope- 
rates at  an  average  eflBciency  of  little  over  67  per  cent, 
although  occasionally  76  per  cent  may  be  achieved.  In 
central  station  operation  85  per  cent  is  the  order  of  the 
day,  and  industrial  operation  on  a  small  scale  without 
adequate  supervision  or  skill  suffers  in  contrast.  Steam 
is  used  to  operate  an  engine  or  a  turbine  at  a  pressure, 
in  industrial  plants,  of  125  to  150  pounds,  and  sometimes 
as  high  as  200  pounds.  Some  manufacturers  require  live 
steam  for  industrial  purposes,  that  is,  in  the  actual  proc- 
ess of  production  and  distinct  from  power,  as  in  cooking, 
dyeing,  or  drying  operations.  Steam  used  for  heating 
the  buildings  is  generally  taken  from  the  engine  exhaust, 
as  the  temperature  of  steam  at  the  throttle  and  exhaust 
pressure  wiU  show  the  relatively  large  amount  of  heat 
energy  which  the  engine  cannot  extract. 

Temperature  of  steam  at  150  pound  pressure  is  365  de^ees  F. 
Temperature  of  steam  at      5  pound  pressure  is  228  degrees  F. 

The  power  jDroduced  by  the  engine  is  measured  by  the 
unit  of  horsepower,  an  arbitrary  measure  that  may  be 
defined  as  33,000  foot-pounds  of  work  per  minute. 

Power  is  a  rate  of  doing  work  and  work  is  the  product 
of  force  times  distance.  One  horsepower  is  33,000 
pounds  moved  through  one  foot  of  distance  per  minute. 
The  steam  engine  is  a  device  for  converting  the  heat 
energy  of  steam  into  mechanical  energj^  and  the  process 


DEPRECIATION,  INTEREST,  AND  POWER         189 

is  extremely  wasteful,  due  entirely  to  the  inability  of  the 
engine  to  operate  at  pressure  low  enough  to  utilize  all 
the  heat  in  the  steam.  The  engine  is  limited  to  atmos- 
pheric pressure,  although  by  an  arrangement  known  as 
condensing,  the  back,  or  exhaust,  pressure  may  be  re- 
duced below  atmosphere  and  thus  convert  more  heat 
energy.  The  limits  at  best  are  very  small  and  the  ave- 
rage engine  does  not  operate  much  better  than  at  10  per 
cent  efficiency  or  cannot  use  more  than  10  per  cent  of  the 
available  heat  units. 

It  can  be  seen  that  the  derivation  of  power  from  coal  is 
attended  by  great  losses  and  the  best  practice  rarely 
secures  better  than  12  to  14  per  cent  of  the  energy  in  the 
coal,  while  average  industrial  practice  probably  does  not 
exceed  five  to  seven  per  cent.  The  costing  of  power  is  an 
accounting  for  this  waste;  it  does  so  by  charging  all 
expenditures  against  the  net  output  at  such  stages  in  the 
course  of  operation  as  may  be  necessary.  In  general 
practice  the  boiler  steam  main  and  the  switchboard  are 
the  terminal  points  for  costing,  and  so  the  usual  depart- 
ments of  expense  are 

Steam 

Light  and  power 

Into  the  steam  department  are  charged  coal,  waste, 
boiler  compound,  fireman's  wages,  its  fixed  charges  with 
coal  representing  fully  50  per  cent  or  more  of  the  total. 
Out  of  the  steam  department  is  secured  so  many  pounds 
of  steam  which  in  turn  are  chargeable  according  to  des- 
tination and  service.  If  live  steam  is  used  in  industrial 
processes,  the  quantity  thus  used  must  be  metered  or 
closely  estimated  and  the  balance  of  the  steam  charged 
against  light  and  power.  Light  and  power  are  charged 
with  engineer's  wages,  the  cost  of  steam,  lubricant,  fixed 
charges,  etc.,  and  the  total  cost  thus  determined  is  used 


190         ESSENTIALS  OF  INDUSTRIAL  COSTING 

to  measure  the  unit  cost  of  the  kilowatt  hour  output  meas- 
ured at  the  switchboard.  The  kilowatt-hours  at  the  switch- 
board may  be  used  for  lighting  or  power.  The  division 
between  the  two  may  be  obtained  from  meters  or  by  the 
wattage  calculated  as  the  lighting  load,  which  may  be 
done  by  ascertaining  the  individual  lamp  wattage,  the 
number  of  lamps  and  the  lighting  period  in  time.  The 
power  load  may  be  metered  or  determined  from  the  total 
motor  power  at  the  load  factor  at  which  they  operate. 

For  costing  purposes  it  is  necessary  to  secure  this 
division  of  power  cost  by  departments.  The  lights  are 
easily  determined  by  departments  and  the  proportionate 
share  of  each  in  the  total  lighting  cost  computed.  The 
departmental  charge  for  power,  if  accuracy  is  desired, 
should  be  metered,  but  if  this  is  not  feasible,  the  dis- 
tribution may  be  made  on  the  basis  of  motor  horsepower. 

In  summar^^,  steam  cost  may  be  prorated  on  the  basis 
of  steam-flow  meter  readings  and  is  most  accurate  when 
handled  in  this  manner.  Power  costs  may  be  distributed 
on  the  basis  of  meter  readings,  but  this  may  be  done  on 
the  basis  of  departmental  motor  capacity.  In  case  there 
is  no  motor  drive,  the  distribution  can  only  be  made  on 
the  basis  of  horsepower  required  per  machine.  The 
horsepower  requirements  of  all  standard  machines  are 
matters  of  record  and  i^iay  be  ascertained.  The  table 
shown  in  Figure  59  covers  certain  leading  industries 
with  their  essential  equipment,  but  if  no  record  is  avail- 
able it  may  be  necessary  to  take  brake  tests  in  order  to 
determine  the  horsepower. 

Heating  by  exhaust  steam  involves  a  credit  to  the 
steam  going  to  the  engine,  based  upon  the  relative  heat 
or  calorific  value  of  the  exhaust  steam  compared  to  live 
steam.  Illustrative  of  the  method  of  calculation  let  us 
assume  a  set  of  specific  conditions  and  calculate  the  credit 


DEPRECIATION,  INTEREST,  AND  POWER         191 

Figure  59. — Horsepower  Requirements  op  Machine  Motors 
1.    Lathes  * 


engine  lathes 

Swing,  Horse- 

inches  power 

14 2 

16 3 

18-20  3 

22-24 5 

27-30  71/2 

36-48  71/2 


SPECIAL   LATHES 


Type 


Horse- 
power 


Car  wheel,  48  in....  20 
Double  axle,  moder- 
ate duty 15 

Double   axle,   heavy 
duty    25 


DRIVING  WHEEL  LATHES 

Size,  Horse- 

inches  power 

51 15 

60-69 20 

79 25 

84 25 

90 30 

50 

100  

5  tail  stock 


2.     Vertical  Boring  Mills  * 

Size  Horsepower 

24-30  in 5 

36-42  in 71/2 

60-90  in 10 

100  in 15-5  rail 

10  ft 20 

71/2  rail 

12  ft 20 

71/2  rail 

14  ft 25 

71/2  rail 

16  ft 30 

10  rail 


3.    Drills 


RADIAL 

Size,  Horse- 

feet  power 

4 3 

5 5 

6 5 

10 71/3 


UPRIGHT 

Size,  Horse- 

inches  power 

Friction   14 

15 1/2 

20-26 1 

28-34 2 

42-50 3 


MULTIPLE-SPINDLE 

Size,  Horse- 

inches  power 

4-2 71/2 

6-2 10 

8-2 10 


^Charles  Bobbins,  transactions  of  the  American  Society  of  Mechanical 
Engineers. 


192  ESSENTIALS  OF  INDUSTRIAL  COSTING 

FiGTJKE  59. — Horsepower  Requirements  of  Machine  Motors 

(Continued) 

4.     Milling  Machines^ 
horizontal,  plain  or  universal 


Table  Feed, 
inches 

Cross  Feed, 
inches 

Vertical  Feed, 
inches 

Horsepower, 
Moderate  Heavy 

24 
30 
36 
50 

8 
10 
12 
12 

18 
18 
20 
20 

3 

5    -71/2 
71/0—10 
10    —15 

vertical  milling  machines 


Table 

Spindle 

Diameter, 

Diameter, 

Horsepower 

inches 

inches 

28 

4 

5 

32 

4 

7y2 

40 

4y2 

10 

54 

5 

15 

70 

6 

20 

SLAB    MILLING   MACHINES 

TTidth  of 
Table,  inches  Horsepower 

24-30   10 

36    15 

60    25 

36  hea\'A'     25 

42  heavy    50 

5.     Horizontal  Boring,  Drilling  and  Milling  Marhines ' 

Spindle,  *      Horse- 

inches  power 

3V2   3 

4   5 

5  7% 

6   10 

7   15 

*  Transactions  of  the  American  Society  of  Meclianical  Engineers. 


DEPRECIATION,  INTEREST,  AND  POWER         193 


Figure  59. — Horsepower  Requirements  op  Machine  Motors 
(Continued) 


6.     Planers  * 


medium  duty 


Size, 
inches 


Horse- 
power 


24  X  24 5 

30  X  30 71/, 

36  X  36 10 

48  X  48 15 

56  X  56 15 


HEAVY   DUTY 


Size 


Horsepower 


24  X  24  in 71/2 

42  X  42  in 25 

56  X  56  in 25 

Frog  and  switch  forge.   30 
12  X   10  ft 60 

10 
14  X  12  ft 75 

12 


7.     Shapers  * 


Size, 

inches 

14-20 

24 

36 


(rail) 
(rail) 

Horse- 
power 

...  3 

...  5 

. . .  71/2 


8.     Crank  Blotters^  Light,  Medium  and  Heavy 


Size,  inches 

Horsepower 

Medium 

10 

3 

5 

10-16 

5 

71/2 

20 

71/2 

10 

26-30 

15 

.... 

Geared  Blotters 

24-60 

20 

< 

9.     Cold  Saws ' 


Diameter,  inches 

Thickness,  inches 

Horsepower 

12 

5/32 

2 

15 

5/32 

2 

18 

3/16 

3 

20 

3/16 

3 

24 

3/16 

5 

32 

3/16 

71/2 

36 

3/16 

10 

*  Transactions  of  the  American  Society  of  MecJuinical  Engineers. 


194 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  59. — Horsepower  Requirements  op  Machine  Motors 
(Continued) 

10.     Grinders  * 


Horsepower 

Size,  itches 

Medium 

Heavy 

10  X  50 

5 

71/2 

10  X  72 

5 

71/2 

10  X  96 

5 

71/2 

10  X  120 

5 

7y2 

14  X  72 

10 

18  X  120 

10 

15 

18  X  144 

10 

15 

18  X  168 

10 

15 

18  X  96 

10 

15 

44-in.  car  wheel  grinder 

30 

11.     Band  Saws 


Diameter  of 

Revolutions 

Maximum  Depth 

Horsepower 

Wheels,  inches 

per  Minute 

of  Timber,  inches 

42 

400-500 

20 

5 

38 

450 

16 

5 

36 

500 

16 

5 

36 

400 

14 

3 

34 

500 

12 

3 

30 

500 

12 

3 

12.     Band  Eesau^ ' 


Diameter  of 
\Ylieel, 
inches 

Revolutions 

per 

Minute 

Width  of 

Saw   Blade, 

inches 

Maximiun 

Depth 

Timber, 

inches 

Motor 

Horsepower 

Revolu- 
tions per 
Minute 

60 
54 
48 
44 
42 
40 
38 

550 
GOO 
650 
650 
650 
700 
450 

8 
6 
5 
4 
4 
3 
2 

36 
30 
36 
24 
24 
20 
12 

50 
40 
30 
20 
15 
15 
7.5 

600 
600 
720 
720 
720 
720 
514 

'  Transactions  of  the  American  Societi/  of  Mechanical  Engineers. 
'  Electrical  Eeview  and  Wesrtern  Electrician. 


DEPRECIATION,  INTEREST,  AND  POWER         195 

Figure  59. — Horsepower  Requirements  of  Machine  Motors 
(Continued) 

13.    Band  Rip  Saws,  Power  Feed* 


Diameter  of 
Wheel, 
inches 

Revolutions 
per  Minute 

Maximum 

Depth  Timber, 

inches 

Motor 

Horsepower 

Revolutions 
per  Minute 

42 
40 

650 
600 

12 
15 

15 
10 

720 
600 

14.     Circular  Saws 


Maximum 
Diameter  of 
Saw,  inches 

Revolutions 

per  Minute 

of  Saw 

Capacity 

Horizontal, 
inches 

Vertical, 
inches 

Horsepower 

42 
36 
32 
30 
24 

900 
1,000 
1,225 
1,200 
1,225 

17 
14 
11 
10 

8 

's 

6 
6 

25 
25 
20 
20 
20 

15.     Circular  Rip  Saws 


Maximum 
Diameter  of 
Saw,  inches 

Maximum 
Revolutions 
per  Minute 

•    Maximum 
Thickness  of 
Stock,  inches 

Feed,  feet 
per  minute 

Horsepower 

20 
16 
12 

2,100 
2,600 
2,400 

6 
5 
2 

60-180 
64-194 
50-100 

15 
15 
7.5 

16.    Hand  Feed  Circular  Rip  Saws ' 


Maximum  Diameter  of 
Saw,  inches 

Saw  Revolutions 
per  Minute 

Horsepower 

14 
16 
20 
24 
30 
36 

2,700 
2,400 
2,000 
1,600 
1,250 
1,000 

7.5 
10 
15 
15 
20 
20 

'Electrical  Review  and  Western  Electrician. 


196 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  59. — Horsepower  Requirements  of  Machine  Motors 
(Continued) 

17.     Power  Feed  Gang  Ripping  Machine' 


Number  of 
Saws 


Maximum 
Revolutions 
per  Minute 


2  3,400  10 

3  2,300  15 

4  2,500  14 
Power  feed  gang  edffer  and  ripper 

8  I  2,500         I  14 


Diameter  of 
Saws,  inches 


Feed,  feet 
per  minute 


180 

200 

100  to  180 

90  to  200 


Horsepower 


15 
30 
25 

35 


IS. 

Circular  Cut-Off  Sous 

2 

Maximum  Diameter 
of  Saw,  inches 

Revolutions  per  Minute 
of  Saw 

Horsepower 

14 
16 

2,700 
2,600 

5 

7.5 

Maximum 

Capacity, 

inches 

8x4  ... 

10  X  4  . . 

12  X  6  . . 

14  X  6  . . 


Maximum 

Capacity, 

inches 

4x4.. 

6x4.. 

8x4.. 
10  X  4  . . 
12  X  5  . . 
14  X  6   . . 


Maximum  Size 

of  Timber, 

inches 

15  X  4 


19.     Inside  Molders 


20.     Outside  Holders* 


21.     Stickers 


Horse- 
power 

....  25 
. ...  25 
. ...  35 
....  35 


Horse- 
power 

. ...  10 
. ...  15 
. ...  20 
....  25 
....  30 
....  35 


Horse- 
power 

..     5 


18  X  4   7.5 

20  X  4   10 


'Electriccl  Eevietv  and  Western  Electrician. 


DEPRECIATION,  INTEREST,  AND  POWER         197 


Figure  59. — Horsepower  Requirements  of  Machine  Motors 
(Continued) 

22,    Jointers  * 
Maximum  Width 

of  Timber,  Horse- 

inches  power 

8  2 

12  2 

16  3 

20  5 

24  7.5 

36  7.5 

23.  Single  Surfaces' 
Maximum  Width 

of  Timber,  Horse- 

inches  power 

16  7.5 

20  10 

24  10 

30  15 

36  15 

24.  Double  Surfaces  ^ 


Maximum  Width 

Horsep 

ower 

Timber,  inches 

Medium  Work 

Heavy  Work 

26 

20 

35 

30 

25 

35 

36 

30 

•• 

25.     Drum  Sanders' 

Number  of  Drums 

Size    Sander,  Maximum 
Width  Stock,  inches 

Horsepower 

1 

30 

10 

1 

36 

15 

1 

42 

15 

2 

30 

20 

2 

36 

20 

2 

42 

20 

2 

48 

25 

3 

•    30 

20 

3 

36 

25 

3 

42  and  48 

30 

3 

54  to  66 

35 

3 

72 

40 

3 

78 

•• 

'Electrical  Eeview  and  Western  Electrician. 


198  ESSENTIALS  OF  INDUSTRIAL  COSTING 

Figure  59. — Horsepower  Requirements  of  Machine  Motors 
{Continued) 

26,     Chisel  Mortising  Machines* 


Maximum  Number 
of  Chisels 

Maximum  Size  of 
Chisel,  Square 

Horsepower 

1 

0.5 

2 

1 

0.75 

2 

1 

0.75 

3 

1 

1.25 

5 

2 

1 

3 

3 

1 

5 

4 

1 

5 

5 

0.8125 

5 

6 

0.8125 

7.5 

7 

0.8125 

7.5 

27.     Planers  and  Matchers* 
Maximum  size 
of  Timber,  Horse- 

inehes  power 

9x6  35 

15x6  40 

20x6  45 

24x6  45 

26x8  45 

by  the  solution  suggested  by  an  article  in  the  Septem- 
ber, 1920,  issue  of  Power  Plant  Engineering.  Assume  a 
noncondensing  Corliss  engine  of  250  horsepower  using 
steam  at  150  pounds  gauge  pressure  and  a  steam  rate  of 
25  pounds  per  i.h.p.  with  back  pressure  of  5  pounds  and 
steam  returns  of  200  degrees  Fahrenheit.  Obviously 
during  the  nonheating  period  there  ^^11  be  no  credit  for 
exhaust  steam  used.  However,  during  the  winter  months 
a  calculation  w^ould  have  to  be  made.  For  simplicity  let 
us  reduce  the  term  of  operation  to  one  day. 

250  h.p.  at  25  lb.  per  i.h.p.  for  9  hours  equals  56,250  lb.  steam- 
Steam  at  150  lb.  pressure  contains  1,195  B.t.u.,  so  that  all  told 
56,250  X  1,195  or  67,218,750  B.t.u.  are  available. 

Steam  heating  in  this  case  only  requires  one-third  of  the  ex- 

'  Electrical  Beview  and  Western  Electrician. 


DEPRECIATION,  INTEREST,  AND  POWER         199 
Figure  60. — ^Range  of  Steam  Consumption  in  Steam  Prime  Movt^js 


Type  of  Prime  Mover 


Single  throttling,  non- 
condensing  engine  ... 

Single  automatic,  shaft 
governor  

Single  condensing  Cor- 
liss   

Compound  condensing, 
automatic  shaft  gov- 
ernor   

Simple  condensing  pop- 
pet   

Marine  triple 

Marine  turbine 

Land  turbine 

Compound  condensing 
Corliss   

Land  triple 

Uniflow  (Strumpf)  sim- 
ple   

Wolf  compound  locomo- 
bile   

Ljungstrom  turbine  . . . 


3  «  ** 

K  >  ^ 

«  "  ^  S 

<u  0)  o  2 
-w      h^  o 


48.0 
38.0 
19.75 

19.75 

15.50 
14.5 
11.4 
10.6 

10.05 
10.08 

9.0 

8.9 
8.0 


3  (P  ►> 
O  >>  <li 

go  o§ 


5.33 
3.60 
2.15 

2.15 

1.72 
1.65 
1.40 
1.30 

1.11 
1.12 

1.08 

1.00 
0.91 


.£:-6 


M  0.5  o. 


4.25 

6.58 

11.10 

11.80 

13.12 
15.5 
18.6 
20.0 

20.2 
19.8 

22.1 

22.4 
24.4 


>Z'i 


3.30 
4.60 
8.33 

8.90 

9.80 
11.00 
13.00 
14.0 

15.0 
14.6 

16.8 

17.5 
18.3 


be 


"3  >>ft< 
Q  tic 

o  c^ 
a  g  =5  o 


39.2 
47.8 
53.1 

55.6 

47.6 
53.4 
61.5 
66.2 

72.2 
65.5 

73.1 

74.1 

74.7 


haust  steam  or  one-third  of  56,250  pounds,  or  18,750  pounds. 
Steam  heating  uses  the  difference  between  5  lb.  and  200°  F.  in 
B.t.u.,  or  1,156 — 169  equals  987.  Therefore,  the  B.t.u.  in  exhaust 
heating  would  be 

18,750  X  987,  or  18,506,250  B.t.u. 

18,506,250 
which  is  • of  the  total  heat  available,  or  27.5  per  cent 

67,218,750 

of  the  total  steam  cost. 


In  other  months  the  proportion  would  be  less. 

The  average  cost  of  power  production  is  composed  as 
follows : 


200 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  61. — Annual  Cost  op  One  Horsepower  in  Factory  Steam 

Power  Plants  ^ 


SIMPLE   non-condensing   ENGINES 


Rated  capacity  of  plant, 
horsepower   

Cost  of  plant  per  horse- 
power '   

Fixed  charges  at  14  per  cent 

Attendance   

Oil  and  other  supplies 

A.  Cost  per  horsepower  less 
fuel   

B.  Pounds  of  steam  per  horse- 
power-hour   

C.  Pounds  of  steam  per  pound 
of  coal  burnt 

D.  Pounds  of  coal  per  horse- 
power-hour =  b/c 

E.  Coal  per  horsepower-year 
at  $1  per  ton 

Cost  of  1  horsepower-year, 
A.  +  E.' \... 


80 

$175.00 
$24.50 
$13.00 

$2.60 

$40.10 

30 

7 

4.29 

$5.90 
$46.00 


^  Plants  operating  10  hours  a  day,  308  days  in  the  year  at  80  to  100  per 
cent  of  rated  capacity;  boilers  hand-fired. 

'  Includes  buildings,  entire  equipment,  and  erection. 

'Cost  with  coal  at  $1  per  ton.  For  any  rate  x  (dollars)  of  fuel  cost  per 
ton,  cost  of  1  horsepower-year  =  A  -(-  'Ex. 

Fuel 50  per  cent 

Wages   18  per  cent 

Oil,  waste,  supplies. ...  4  per  cent 

Repairs    3  per  cent 

Depreciation 25  per  cent 


100  per  cent 


The  element  of  fuel  is  so  high  in  power  costs  that  it 
indicates  the  urgent  necessity  of  engine  equipment  of 
the  least  possible  steam  consumption  consistent  with  in- 
vestment. The  range  in  steam,  and  hence  coal  consump- 
tion, is  very  wide,  and  as  evidence  there  are  submitted 
herewith  the  data  in  Figure  60  taken  from  an  article  in  a 
National  City  Bank  bulletin. 

It  is  obvious  that  such  differences  in  operating  econ- 


DEPRECIATION,  INTEREST,  AND  POWER         201 

Figure  61. — Annual  Cost  of  One  Horsepower  in  Factory  Steam 

Power  Plants 


compound  condensing  engines 


100 

300 

500 

1,000 

2,000 

$170.00 

$23.80 

$12.00 

$2.40 

$126.00 

$17.65 

$8.60 

$1.72 

$96.00 

$13.45 

$6.20 

$1.24 

$60.00 

f8.40 
$3.50 
$0.70 

$56.00 
$7.85 
$3.00 
$0.60 

$38.20 

$27.97 

$20.89 

$12.60 

$11.45 

20 

18 

16 

15 

14 

8 

8 

9 

9 

9 

23 

2.25 

1.78 

1.67 

1.56 

$3.44 

$3.09 

$2.45 

$2.30 

$2.15 

$41.64 

$31.06 

$23.34 

$14.90 

$13.60 

omy  would  materially  affect  costs  and  to  illustrate  this, 
as  well  as  to  present  in  condensed  form  the  costs  of 
actual  practice,  Figure  61,  taken  from  the  Engineering 
Magazine,  is  presented. 

The  cost  of  power  is  affected  to  some  extent  by  the 
number  of  hours  the  plant  operates  and  this  point  is 
invariably  brought  up  when  central  station  versus  local 
power  costs  are  discussed.  That  it  has  an  important 
bearing  on  the  cost  of  power  may  be  gathered  from  the 
following  data  quoted  from  E.  J.  Pigott's  lecture  at  Johns 
Hopkins  University: 


Hours  Work 
8 

10 
16 
20 
24 


Use  Factor 
18  —  24  per  cent 
21  —  28  per  cent 
30  —  42  per  cent 
36  —  46  per  cent 
45  —  60  per  cent 


202  ESSENTIALS  OF  INDUSTRIAL  COSTING 

With  a  heavy  fixed  investment,  such  as  a  power  plant 
represents,  the  percentage  of  activity  bears  strongly  on 
the  unit  cost  of  production. 

To  conclude  and  to  revert  to  the  essential  point.  In 
industrial  costing  power  and  steam  constitutes  a  sizable 
factor  in  expense  and  the  accurate  collection  of  the  charge 
it  represents  and  its  distribution  are  important  phases  of 
costing  effort.  The  cost  is  obtained  by  departmentaliz- 
ing the  power  production  into  steam  and  power  depart- 
ments. Live  steam  is  metered  if  used  for  industrial  pur- 
poses, otherwise,  charged  into  power.  Power  is  credited 
with  the  value  of  exhaust  steam  used  in  heating  on  the 
basis  of  relative  calorific  service.  Power  is  distributed 
by  meter  readings  on  motors  or  by  motor  horsepower  or 
by  machine  horsepower  ratings  to  each  department  based 
upon  its  requirements  as  thus  indicated. 


CHAPTER  IX 

THE  DISTRIBUTION  AND  APPLICATION  OF  EXPENSE  IN  COSTING 

It  is  one  thing  to  determine  what  are  fixed  charges  and  quite  another 
to  arrange  for  their  equitable  distribution.  The  aim  is  to  have  each 
unit  of  production  bear  its  due  and  proper  proportion  of  the  total, — 
Porter. 

Distribution  of  Expense.— The  manner  in  which  ex- 
pense is  collected  and  the  basis  of  the  introduction  into 
expense  of  such  items  as  interest  and  depreciation  have 
been  presented  and  the  topic  of  this  chapter  will  be  the 
method  of  expense  distribution  whereby  overhead  rates 
on  labor  or  machine  or  process  hour  rates  are  established 
and  ultimately  applied  to  the  cost  of  the  product. 

Expense  departments  have  been  seen  to  consist  of  two 
types,  namely,  the  contributing  and  the  productive,  simi- 
lar to  the  indirect  and  direct  classification  of  labor  and 
materials.  The  contributing  departments  are  absorbed 
by  the  productive  departments  through  a  system  of  pro- 
ration, which  acts  by  direct  transfer  or  by  the  fusion  of 
several  contributing  departments  which,  when  so  con- 
densed, are  then  distributed  to  the  productive  depart- 
ments. The  way  in  which  this  is  done  is  important  to 
consider,  for  it  has  a  measurable  influence  upon  final 
accuracy,  which  may  be  better  comprehended  in  the  light 
of  the  fact  that  contributing  departments  frequently  com- 
prise 30  per  cent  of  total  expense  and  may,  under  some 
circumstances,  amount  to  as  much  as  50  per  cent.  It 
will  be  obvious  that  the  basis  of  the  disposition  of  con- 
tributing departments  to  and  through  the  productive  de- 

203 


204  ESSENTIALS  OF  INDUSTRIAL  COSTING 

partments  bears  almost  as  much  on  final  results  as  the 
application  of  the  productive  expense  departments  to 
productive  labor. 

Contributing  Expense  Departments.— Unfortunately  it 
is  impossible  to  determine  precisely  the  arithmetic  rela- 
tion existing  between  the  contributing  department  ex- 
pense and  the  productive  department  expense.  This 
point,  although  not  true  of  all  such  departments,  may  be 
better  grasped  by  the  enumeration  of  a  few  contributing 
departments,  as  follows: 

1.  Office 

2.  Garage 

3.  Laboratorj' 

4.  Engineering  or  drafting 

5.  Machine  shop 

6.  Millwright 

7.  Heat,  light,  and  power 

8.  Eepair  or  service 

9.  General  factory 

These  departments  encompass  work  and  service  which 
either  in  part  or  in  their  entirety  cannot  be  charged  into 
costs  directly  to  productive  expense  departments.  Fre- 
quently some  of  the  elements  which  compose  these  ex- 
pense departments  can  be  charged  as  productive  depart- 
ment expense,  or  to  asset  accounts,  but  the  identity  of  a 
department  as  a  contributing  department  is  determined 
by  the  fact  that  after  all  productive  charging  off  a  residue 
of  expense  remains  that  bears  no  direct  functional  rela- 
tion with  productive  labor,  and  hence  such  a  residue  must 
be  applied  indirectly.  The  application  of  these  depart- 
ments to  productive  costs  is  negotiated  by  clearing  them 
through  the  productive  departments  from  which  points 
they  are  absorbed  into  costs. 

The  basis  of  this  proration  or  clearing,  the  selection 
of  the  unit  of  measurement  or  other  physical  or  financial 


DISTRIBUTION  OF  EXPENSE  205 

relationship  whereby  these  departments  are  projected 
into  productive  departments  and  thence  into  costs  is 
worthy  of  most  careful  study.  In  many  cases  time  sup- 
plies a  convenient  unit,  in  others  some  measure  such  as 
motor  horsepower  or  radiating  surface  is  employed, 
whereas  in  others  some  device  such  as  a  steam  flow 
meter  or  gas  meter  may  be  used.  The  essential  motive 
is  to  determine  the  basis  of  measurement  which  approxi- 
mates the  probable  facts  most  closely.  For  example,  a 
repair  machine  shop  may  charge  its  time  against  depart- 
ments with  commensurate  share  of  expense  according  to 
the  work  actually  done  and  the  time  spent  for  the  depart- 
ment. Power  expense  may  be  distributed  on  the  basis 
of  respective  horsepower  requirements  of  the  machinery 
within  the  department ;  steam  by  the  relative  proportions 
of  radiating  surface  within  the  department;  and  steam 
may  be  metered  by  departments  and  an  absolute  basis 
thus  obtained  for  apportioning  the  expense  contained 
in  these  departments. 

There  are  times  when  the  expense  of  a  service  is  accu- 
mulated within  a  department  in  order  to  localize  and  to 
reduce  to  further  refinement  the  items  composing  it,  even 
though  the  particular  purpose  or  service  rendered  may 
be  chargeable  to  only  one  productive  department.  This 
arrangement  possesses  statistical  value  only  and  it  is 
not  a  costing  necessity  and  is  mentioned  only  to  illus- 
trate the  conditions  which  shape  the  character  of  the 
contributing  departments. 

Administrative  Expense.— The  specific  items  of  ex- 
pense which  are  involved  in  this  discussion  and  the  spe- 
cific contributing  departments  will  now  be  considered. 
Administrative  expense  consists  largely  of  the  salaries 
of  officials,  the  association  of  whose  duties  and  labors 
with  the  cost  of  production  of  an  article  is  not  usually 


206  ESSENTIALS  OF  INDUSTRIAL  COSTING 

apparent,  although  unquestionably  existent  and  of  trans- 
cendent business  value.  The  problem  of  securing  the 
proper  proportion  of  administrative  expense  may  be 
simplified  to  some  extent  by  a  division  of  effort  along  the 
two  fundamental  lines,  selling  and  producing.  Argument 
to  the  contrary  notwithstanding,  it  is  quite  possible  for 
an  executive  to  appraise  the  relative  value  of  his  service 
to  sales  and  to  production.  This  may  not  be  a  function 
of  time,  for  conception  and  judgment  do  not  often  ope- 
rate on  that  basis,  but  time  is  a  reasonably  fair  guide 
and  may  be  modified  by  such  other  considerations  as  may 
apply.  The  point  is  that  it  is  possible  to  distribute  the 
cost  of  administrative  service  to  sales  and  to  production. 
This  is  the  first  step  in  the  costing  of  administrative 
expense  and  the  share  chargeable  to  production  appears 
as  an  item  in  the  General  Factory  Department. 

1.  Oifice  Department. — Office  department  is  a  reser- 
voir for  accumulating  the  expense  of  maintaining  the 
book  records  of  the  transactions  and  correspondence  inci- 
dent to  the  conduct  of  the  business.  As  with  adminis- 
trative expense  its  total  is  apportioned  in  part  to  the 
factory  and  in  part  to  the  selling  departments.  The  share 
chargeable  to  the  factory  is  transferred  to  the  General 
Factory  Department  as  an  intervening  step  to  its  charge 
into  the  expense  of  the  productive  departments.  Prob- 
ably the  fairest  basis  of  division  of  office  expense  is  ao 
cording  to  the  proportions  of  office  payroll  chargeable  to 
selling  and  production,  respectively. 

2.  Garage  Department. — Garage  represents  a  depart- 
ment which  may  serve  both  selling  and  production  and, 
in  the  case  of  the  latter,  more  than  one  department.  For 
instance,  the  hauling  of  shipments  to  freight  or  express 
stations  is  distinctively  a  selling  expense,  the  handling 
of  raw  material  until  it  arrives  at  the  factory  is  a  general 


DISTRIBUTION  OF  EXPENSE  207 

factory  department  charge,  whereas  the  hauling  of  coal 
and  ashes  is  chargeable  to  the  steam  department.  This 
distribution  may  be  obtained  by  means  of  establishing 
either  a  truck  hour  or  a  truck  mile  cost  and  keeping  rec- 
ords of  occupation  or  engagement  on  either  of  the  two 
bases.  With  short  hauls  where  time,  more  than  distance, 
is  the  controlling  factor,  the  truck  hour  probably  will 
result  in  more  equitable  distribution. 

3.  Laboratory  Department, — The  laboratory  is  the 
symbol  of  applied  science  and  it  is  an  institution  of  in- 
creasing frequency  in  manufacture.  Its  service  is  three- 
fold, to  develop  by  research  new  methods  or  economies 
for  the  particular  manufacture,  to  control  the  quality  of 
raw  materials  by  routine  analyses  and  by  the  preparation 
of  specifications  to  which  analyses  must  correspond,  and 
to  guide  the  manufacturing  processes  with  the  object  of 
maintaining  standard  quality  and  character. 

Laboratory  expense  is  the  kind  of  expense  that  it  is 
well  to  isolate  for  purposes  of  statistical  control  as  well 
as  for  proper  distribution.  The  value  of  its  service  to 
the  various  productive  departments  may  be  measurable 
directly  and  if  so,  it  is  by  far  the  preferable  way  to 
handle  it.  If  this  relation  is  not  distinct,  it  must  then  be 
collected  in  the  composite  General  Factory  total  for  ulti- 
mate apportionment  to  the  productive  departments  with 
all  other  items  contained  therein.  It  niiay  be  that  some 
of  the  laboratory  service  is  of  a  development  nature  and 
as  such,  chargeable  to  a  deferred  expense  account,  there 
to  await  the  production  or  the  process  for  which  it  was 
intended  to  benefit  and  then  to  be  applied  as  the  sei'vice 
and  nature  of  the  production  or  process  may  warrant. 

4.  Engineering  and  Drafting  Department. — The  work 
of  this  department  may  pertain  predominantly  to  either 
sales  or  production,  dependent  on  the  operating  condi- 


208  ESSENTIALS  OF  INDUSTRIAL  COSTING 

tions  of  the  particular  industry.  Much  of  the  work  in 
such  a  department  may  be  charged  directly  into  costs,  as 
it  may  apply  directly  to  jobs.  Naturally  wherever  this 
can  be  it  should  be  done.  Some  of  the  expense  of  such  a 
department  is  frequently  incurred  for  development  work 
which,  as  with  the  Laboratory  Department,  may  be  held 
in  a  suspense  account  pending  its  ultimate  distribution 
to  the  production  for  which  it  was  the  preliminary.  This 
arrangement  is  made,  of  course,  in  order  to  relieve  cur- 
rent production  of  charges  contingent  on  future 
conditions. 

5.  Machine  Shop  Department. — Modem  industry  rests 
upon  the  machine  as  its  indispensable  medium  of  pro- 
duction. Machine  operation  is  destructive  to  original 
condition  and  inevitably  brings  a  succession  of  repairs 
and  small  renewals,  attention  to  which  may  be  summed 
up  in  the  word  "maintenance."  Practically  every  plant 
must  be  prepared,  therefore,  for  these  necessities  and  so 
it  is  the  customary  arrangement  to  equip  a  machine  shop 
in  the  manner  and  to  the  extent  needed  for  these  minor 
emergencies.  The  repair  machine  shop  presents  little 
complication  in  its  proper  participation  in  costs.  The 
expense  incident  to  its  operation  is  collected  within  the 
Machine  Shop  Department.  The  labor  in  the  department 
is  spent  on  orders  which  furnish  direct  charges,  either 
to  productive  departments  or  asset  accounts  and  the 
expense  is  levied  on  this  labor  exactly  as  if  it  were  a 
productive  department. 

6.  Millwright  Department. — Millwright  expense  is 
simply  another  phase  of  maintenance  and  is  distinguished 
from  the  machine  shop  only  where  no  established  depart- 
ment or  headquarters  for  the  purpose  is  arranged  so  that 
the  millwrights  working  in  different  departments  charge 
their  time  directly  thereto.    If  a  department  is  equipped 


DISTRIBUTION  OF  EXPENSE  209 

for  pipe  cutting,  with  cut-off  saws  and  planers  for  mis- 
cellaneous millwright  work,  then  it  is  handled  exactly  as 
the  repair  machine  shop. 

7.  Steam,  Light,  and  Power  Departme'dt. — The  dis- 
tribution of  Steam,  Light,  and  Power  expense  depart- 
ment has  been  discussed  in  the  preceding  chapter  because 
the  method  of  distribution  rests  upon  an  understanding  of 
the  technical  side  of  the  subject  which  was  outlined  in 
that  chapter. 

8.  Repair  or  Service  Department. — Manufacturers  are 
called  upon  increasingly  to  maintain  in  good  operating 
condition  the  commodities  they  sell.  Accordingly,  articles 
are  sent  back  to  the  factory  for  minor  repairs  or  replace- 
ments. Generally  this  work  is  handled  in  a  separate 
department  especially  provided  for  the  purpose,  because 
that  arrangement  has  been  found  more  economical  than 
to  have  repairs  made  as  part  of  the  regular  production. 
A  department  of  this  kind  may  repair  without  charge  or 
at  cost  or  at  a  profit.  It  is  obvious  that  gratis  repairs 
react  as  an  expense  and  are  properly  a  part  of  the  selling 
expense.  Repairs  at  cost  or  at  a  profit  involve  a  process 
control  account  into  which  the  total  expense  of  the  repair 
department  is  charged  or  which  is  credited  with  the  cost 
of  repairs  billed.  For  convenience  the  costing  of  repairs 
can  best  be  handled  by  establishing  a  separate  expense 
department,  part  of  which,  represented  by  no  charge  re- 
pairs, would  be  transferred  to  selling  expense  and  the 
balance  into  a  special  repair  process  account,  or,  if  the 
amount  is  too  small  to  justify  this  precaution  into  the 
general  process  account. 

9.  General  Factory  Department. — General  Factory  is 
the  caption  of  that  expense  department  which  is  the  final 
reservoir  of  items  collected  at  once  or  impounded  origi- 
nally in  other  places  and  subsequently  transferred  to  this 


210  ESSENTIALS  OF  INDUSTRIAL  COSTING 

department.  It  is  the  last  point  of  concentration  from 
which  contributing  expense  is  applied  to  the  productive 
departments.  The  total  of  this  department  is  frequently 
an  appreciable  proportion  of  total  expense  and  the  basis 
of  its  distribution  to  the  productive  departments  is  criti- 
cally related  to  accuracy.  The  usual  assumption  is  that 
General  Factory  Department  containing  as  it  does  the 
cost  of  superintendence  factory  clerk  hire,  is  a  function 
of  productive  hours  and  that,  therefore,  its  total  should 
be  distributed  over  the  productive  departments  on  the 
basis  of  the  productive  hours  contained  therein.  There 
is  much  in  support  of  this  assumption  and  in  practice  I 
have  used  it  invariably,  albeit  with  frank  admission,  of 
its  possible  divergence  from  what  would  be  the  facts  if 
they  were  determinate. 

Objection  to  this  basis  centers  in  the  argument  that 
hours  are  not  truly  a  comparative  measure,  and  further, 
that  a  department  containing  relatively  cheap  labor,  such 
as  unskilled  women,  would  receive  a  share  of  the  General 
Factory  Department  expense  greater  than  some  other 
department  of  fewer  hands  but  of  greatly  higher  skill,  and 
that,  therefore,  the  dollar  of  productive  labor  value  is 
the  fair  basis.  There  is  merit  to  this  contention  but 
probably  no  greater  general  applicability  than  the  pro- 
ductive hour  basis.  In  fact,  no  dogmatic  generality  can 
be  asserted  on  this  point,  for  there  does  not  exist  any 
measurable  basis  for  absolute  accuracy  and  any  measure 
adapted  is  at  best  empirical.  The  chief  endeavor  should 
be  to  minimize  the  amount  of  expense  in  general  factory 
and  to  charge  every  possible  dollar  to  a  productive  ex- 
pense department  once  it  is  established  that  it  cannot  be 
considered  as  productive  labor  or  productive  material. 
When  the  contributing  departments  have  been  applied  to 
the  productive  departments  the  final  step  is  the  applica- 


DISTRIBUTION  OF  EXPENSE  211 

tion  of  the  productive  expense  so  collected  to  the  labor 
costs.    This  is  done  essentially  in  three  ways : 

1.  Direct  percentage  relation 

2.  Individual  machine,  machine  group,  hourly  rate,  or 

process  hourly  rate 

3.  Unit  basis 

Direct  Percentage  Rate. — The  Direct  Percentage  rela- 
tion is  the  prevailing  method  of  costing  expense  and  ope- 
rates by  determining  the  ratio  of  a  dollar  of  expense  in  a 
productive  department  to  a  dollar  of  labor.  An  overhead 
rate  of  80  per  cent  means  80  cents  of  expense  for  each 
dollar  of  labor,  and  a  rate  of  180  per  cent  means  $1.80  of 
expense  for  each  dollar  of  labor.  It  is  a  simple  and, 
generally,  an  accurate  method  of  applying  expense  and 
it  only  comes  into  question  when  it  is  difficult  to  delineate 
productive  labor  or  where  the  proportion  of  expense  to 
labor  is  exceedingly  high,  as  in  cases  of  400  or  500  per 
cent  overhead  rates.  In  such  a  case  as  the  latter  there 
exists  possibility  of  magnifying  errors  in  the  Productive 
Labor  Distribution  and  so  generally  some  other  method  is 
employed. 

Machine  Hour  Rate.— The  percentage  rate  also  mis- 
represents costs  if  the  departmental  subdivision  has  not 
been  sufficiently  fine,  with  the  result  that  items  of  expense 
do  not  have  proportionate  relation  to  labor.  For  in- 
stance, assume  a  drill  department  consisting  of  machines 
of  a  wide  range  in  sizes  and  hence  of  varying  cost  of 
installation.  The  percentage  method  averages  all 
charges  and  proposes  that  every  dollar  of  productive 
labor,  no  matter  if  it  is  spent  on  a  large  or  a  small  ma- 
chine, receives  the  same  quota  of  expense  which  is  obvi- 
ously inequitable.  The  machine  and  the  process  hour 
rates  have  been  devised  to  obviate  this  difficulty  and  to 
achieve  thereby  closer  accuracy.    The  machine  hour  rate 


212  ESSENTIALS  OF  INDUSTRIAL  COSTING 

registers  the  activity  of  the  machine  or  group  of  identi- 
cal machines  and  accounts  for  the  cost  of  this  activity  in 
the  same  unit  of  time.  The  method  of  doing  this  is  indi- 
cated in  the  Machine  Grinding  Department  in  the  Ex- 
pense Analysis  illustrated.  The  process  hour  rate  is 
obtained  in  a  similar  manner  and  may  be  varied  by  deter- 
mining the  expense  and  labor  cost  per  unit  of  production, 
such  as  pound,  yard,  etc. 

The  Unit  Basis.— The  unit  basis  is  a  variant  of  the 
process  rate  employed  when  the  time  involved  on  proc- 
essing differs  according  to  the  grade  or  size  of  the  com- 
modity and  when  the  current  division  of  labor  is  difficult 
to  secure.  The  drawing  of  wire,  the  fulling  of  woolen 
cloth,  the  dyeing  and  diyiug  of  fabrics  are  typical  opera- 
tions which  may  be  costed  by  the  unit  system.  The  unit 
basis  operates  by  determining  the  time  or  value  relation- 
ship or  both  between  different  sizes  or  grades  of  a  com- 
modity and  using  the  arithmetic  ratios  of  these  times  to 
establish  equivalent  values  so  that  the  entire  production 
may  be  reduced  to  a  unit  or  comparable  basis.  For  in- 
stance, in  cloth  fulling  the  time  per  yard  varies  with  the 
quality  of  the  goods  and  a  line  may  be  classified  on  this 
operation  as  follows : 


Time  Per  Yard 

Unit  Ratio 

Class  A   1             234  hours 

1.83 

Class  B    214  bours 

Class  C    1             114  hours 

Class  D   !             21/4  hours 

1.67 
1.00 
1.15 

Some  class  has  to  be  taken  as  unity  and  then  the  deci- 
mal relation  of  each  of  the  others  to  it  is  calculated.  The 
production  by  means  of  these  factors  can  be  reduced  to  a 
unit  production  basis : 


DISTRIBUTION  OF  EXPENSE 


21B 


Class  A 

Class  B 

Class  C 

Class  D 


Actual  Production 


Unit  Production 


10,000  yards  @  1.83 
5,000  yards  @  1.67 

18,000  yards  @  1.00 
7,000  yards  @  1.5 


40,000 


18,300 

8,350 

18,000 

10,500 

55,150  unit  yards 


Assume  a  total  labor  and  expense  of  fulling  of 
$2,787.60  and  this  means  a  cost  per  unit  yard  of  $0.0505. 
If  the  actual  cost  per  yard  of  any  class  is  desired,  it  is 
only  necessary  to  multiply  the  unit  cost  by  the  factor, 
as  example  of  which  the  actual  cost  of  fulling  a  yard  of 
class  A  goods  would  be  $0.0505  times  1.83,  or  $0.09  per 
yard. 

Fallacy  of  Applying  Expense  to  Material.— This 
describes  the  three  leading  ways  of  applying  expense  in 
costs,  though  in  the  case  of  the  percentage  basis  there 
are  modifications  which  should  be  discussed.  It  has  been 
the  practice  in  some  industries  to  apply  expense  rates  on 
the  total  of  labor  and  material  value  and  not  on  labor 
alone.  This  method  is  one  of  the  false  traditions  which 
have  come  from  the  past  and  it  can  be  said  emphatically 
that  material  value  is  not  in  any  way  connected  with 
expense.  The  reductio  ad  absurdum  of  this  method  was 
encountered  by  me  in  the  pocket  cutlery  manufacture.  In 
this  industry  it  had  been  the  practice  to  levy  overhead  on 
the  total  of  both  labor  and  material.  It  so  happened  that 
pearl  used  as  a  knife  covering  composed  33  per  cent  of 
the  prime  cost  of  manufacture  as  against  other  coverings 
almost  negligible  in  proportion.  Despite  the  fact  the 
actual  labor  required  was  substantially  the  same  for  stag 
and  pearl  covered  knives,  the  pearl  knives  indicated  a 
tremendously  higher  cost  because  the  burden  was  applied 
to  the  material  as  well  as  the  labor  value. 


214  ESSENTIALS  OF  INDUSTRIAL  COSTING 

Introduction  of  Concrete  Example.— "With  this  discus- 
sion of  the  principles  of  expense  distribution  concluded, 
their  application  will  now  be  considered  and  this  will  be 
done  by  a  complete  exposition  of  an  actual  expense 
analysis.  It  has  been  thought  that  perhaps  the  best 
manner  in  which  to  do  this  would  be  to  present  a  complete 
working  example  illustrating  the  composition  as  well 
as  the  closing  out  of  this  important  cost  record.  The 
treatment  of  this  representative  Expense  Analysis  will  be 
developed  along  the  following  lines : 

1.  Nature  of  departmental  divisions 

2.  Structure  of  the  record  itself 

3.  Original  sources  of  entries 

4.  Method  of  closing  out 

The  expense  analysis  is  composed  of  two  essential 
tjT^es  of  departments  known  as  contributing  and  produc- 
tive, the  distinction  between  which  has  been  discussed  at 
length  in  Chapter  VII  and  previously  in  this  chapter. 
The  actual  designations  of  the  departments  in  each  of 
these  classes  in  this  particular  analysis  are  as  follows: 

Contributing 

1.  Office  Department 

2.  Garage  Department 

3.  Machine  Shop 

4.  Steam  Department 

5.  Heat,  Light  and  Power  Department 

6.  General  Factory  Department 

Productive 

7.  Press  Department 

8.  Forge  Department 

9.  Heat  Treating  Department 

10.  Machine  Grinding  Department 

11.  Hand  Grinding  Department 

12.  Blade  Preparatory  Department 

13.  Spring  Preparatory  Department 

14.  Covering  Department 

15.  Assembly  Cutlery  Department 


DISTRIBUTION  OF  EXPENSE  215 

16.  Hefting  Department 

17.  Finishing  Department 

18.  Buffing  Department 

19.  Cleaning  and  Packing 

20.  Selling  Expense 

The  items  composing  departmental  expense  are  auto- 
matically defined  and  located  in  the  Expense  Analysis  by 
the  serial  number  of  the  department  and  the  letter  with 
which  each  line  on  eveiy  sheet  is  designated. 

For  instance,  14J  in  the  Expense  Analysis  illustrated 
(Figure  62)  is  the  code  index  for  miscellaneous  non- 
productive labor  in  Department  14,  the  Covering  De- 
partment, and  7E  is  the  similar  symbol  for  belting  used 
in  Department  7,  the  Press  Department.  This  index,  or 
code,  system  is  used  throughout  all  distributions  of  data 
composing  the  Expense  Analysis  as  will  be  specifically 
illustrated  later  in  this  discussion.  The  record  provides 
for  the  posting  of  the  monthly  amount  of  each  item,  the 
sub-total  and  final  total  of  all  these  items  and  then  a 
cumulative  total  of  these  amounts  for  the  year  up  to  any 
month.  It  further  provides  for  this  same  information  for 
the  previous  year.  This  is  effected  by  the  arrangement 
of  four  columns  for  each  (see  Fignire  4),  as  illustrated, 
the  captions  of  which  are : 

Month  of ,  current  year 

Period  to  date,  current  year 

Month  of ,  previous  year 

Period  to  date,  previous  year 

Each  department  in  the  Expense  Analysis  will  further 
be  found  to  have  two  classifications  of  expense,  namely, 
direct  and  indirect.  The  direct  expense  items  are  those 
which  may  be  charged  directly  to  the  department  and 
which  to  'a  large  extent  fluctuate  proportionately  with 
operating  activity.  The  indirect  expense  items  are  those 
which  are  charged  from  contributing  departments,  such 


216  ESSENTIALS  OF  INDUSTRIAL  COSTING 

as  office,  garage,  machine,  etc.,  and  they  also  contain  the 
fixed  charges  of  the  particular  department.  These 
charges,  by  their  nature,  are  constant  and  fixed,  regard- 
less of  the  degree  of  productive  activity  within  the 
department. 

The  sum  of  the  direct  and  indirect  expense  gives  the 
total  departmental  expense  and  the  ratio  of  this  amount 
to  that  of  the  productive  labor  for  that  department  gives 
the  overhead  or  expense  rate. 

In  the  case  of  machine  hour  rates  the  sum  of  total  ex- 
pense and  productive  labor,  if  itemized  as  such,  is  divided 
by  the  number  of  active  machine  hours  to  determine  the 
machine  hour  rate. 

The  sources  of  data  for  the  Expense  Analysis  are : 
Payroll  Distribution 
Supply  Requisition  Distribution 
Voucher  Register 
Journal  entries  covering: 
Life  insurance 
Liability  insurance 
Fire  insurance 
Taxes 
Depreciation  and  other  reserves 

It  might  be  well  at  this  time  to  recall  that  these  various 
sources  of  expense  data  have  been  discussed  and  illus- 
trated in  the  text  previously  in  connection  with  their  con- 
tribution to  costs  generally,  and  particularly  to  call  at- 
tention to  the  fact  that  the  illustrations  used  are  the  same 
ones  which  supply  the  information  appearing  in  this 
model  expense  analysis.  In  other  words,  the  text  has 
been  developed  by  the  use  of  examples  appearing  in 
various  places,  but  all  of  which  are  part  of  the  general 
scheme  of  presenting  a  complete,  concrete  working  ex- 
ample of  the  theory  developed  in  the  text. 

Payroll  Distribution.— Considering  then,  as  the  first 
source  of  expense  entry,  that  known  as  the  Payroll  Dis- 


DISTRIBUTION  OF  EXPENSE  217 

tribution,  if  the  illustration  in  Figure  7  is  reverted  to 
there  will  be  found  all  of  the  data  pertaining  to  the  pay- 
roll expenditures.  The  payroll,  as  may  be  seen,  is  sub- 
divided or  classified  and  each  amount  thus  classified  is 
transferred  to  the  expense  analysis  as  described  here- 
with. Eeference  to  this  distribution  will  show  each  item 
coded  by  the  department  number  and  line  letter,  by  which 
it  is  identified.  For  example,  select  on  the  Payroll  Distri- 
bution item  9J  of  $376.70  and  then  turn  to  Department  9 
in  the  Expense  Analysis,  line  J,  which  will  be  seen  to  be 
miscellaneous  labor  and  also  correctly  posted  as  $376.70. 
Every  item  on  the  Payroll  Distribution  may  be  checked 
to  the  Expense  Analysis  and  in  so  doing  the  actual  steps 
of  compiling  the  Expense  Analysis  may  be  followed  in 
so  far  as  payroll  items  are  concerned. 

Supply  Requisition  Distribution.— The  Supply  Requisi- 
tion Distribution,  Figure  6,  was  used  to  illustrate  that 
part  of  the  text  describing  its  function  in  costing  and  is 
now  referred  to  again  to  explain  its  relation  to  the  Ex- 
pense Analysis,  Here  again  the  code  or  symbol  identifica- 
tion is  used  as  with  the  Payroll  Distribution.  Item  15M 
for  $26.72  on  the  supply  requisition  will  be  found  in  de- 
partment 15,  the  Assembly  Department,  as  miscellaneous 
supplies  and  item  IIF  for  $15.22  may  be  located  in  the 
Expense  Analysis  as  emery  wheel  dressers  in  the  Hand 
Grinding  Department.  The  total  of  the  Supply  Requi- 
sition Distribution  so  itemized  and  so  posted  to  the  Ex- 
pense Analysis  accounts  for  that  element  of  expense 
incurred  by  the  consumption  of  stores  and  is  a  credit  to 
that  account  and  a  charge  to  the  control  account  of 
Manufacturing  Expense. 

Voucher  Register. — The  Voucher  Register,  Figure  8, 
is  an  immensely  important  member  in  the  costing  struc- 
ture, but  its  contribution  to  the  Expense  Analysis  is 


218  ESSENTIALS  OF  INDUSTRIAL  COSTING 

limited  to  the  data  obtained  from  the  two  columns,  manu- 
facturing expense  and  selling  expense.  The  items  ap- 
pearing under  these  captions  in  the  Expense  Analysis 
constitute  charges  to  manufacturing  expense  which  can  be 
made  in  no  other  way.  They  contain  charges  for  such 
matters  as  outside  services,  as  auditing,  purchased  re- 
pairs, and  they  also  include  petty  cash  charges  which  take 
this  channel  into  expense  by  use  of  a  monthly  voucher 
covering  total  expenditures  for  the  month  from  the  im- 
prest fund.  Keference  to  the  Voucher  Register  will  show 
that  these  entries  are  indexed  by  code,  as  illustration  of 
which  consider  item  IK  of  $75.84,  defining  the  telegraph 
charges  to  office  expense  in  the  month. 

Fixed  Charges  and  Similar  Items.— All  other  expendi- 
tures portrayed  in  the  Expense  Analysis  are  derived 
from  journal  entries.  The  cost  of  the  liability  and  life 
insurances  is  calculated  departmentally  each  month  ac- 
cording to  the  number  of  men  employed.  The  total 
amount  thus  computed  is  journalized  as  follows : 

Dr.  Manufacturing  Expense 

Cr.  Life  Insurance 
Liability  Insurance 

The  so-called  fixed  charges  are  obtained  from  the  Dis- 
tribution appearing  as  Figure  54.  Reference  to  this  will 
show  the  items  of  depreciation,  taxes,  and  insurance  for 
each  department.  Item  19BB,  amounting  to  $78.38,  is  the 
depreciation  appearing  in  the  Expense  Analysis  for  the 
cleaning  and  packing  department,  while  12AA,  amounting 
to  $1.62,  is  the  monthly  tax  expense  for  the  blade  prepara- 
tion department  in  the  Expense  Analysis,  and  6Z,  amount- 
ing to  $119,91,  is  the  insurance  charge  to  general  factory 
department  for  the  month,  and  will  be  found  properly 
posted  to  the  Expense  Analysis  according  to  its  code. 


DISTRIBUTION  OF  EXPENSE 


219 


Figure  62. — Complete  Expense  Analysis  with  Full  and  Actual  Work- 
ing Details  as  Devised  fob  a  Cutlery  Manufaotubek 


Share  of  Administrative  salary 

Office   manager   salary    

Stenographic    salary    

Billing  clerical  salary   

Invoice    clerical    salary    

Accounting   salaries    

Miscellaneous   clerical  salaries    . 


Postage    

Telephone     

Telegraph    

Stationery    

Miscellaneous  supplies 
Miscellaneous  expense 
Millwright  labor  .... 
Millwright  material     . 


Machine  shop  labor     . . 
Machine  shop  expense 
Machine  shop  material 


Share  of  group  life  insurance 
Share  of  liability  insurance    . 

Total  direct  expense   

Share  of  insurance    

Share  of  taxes    

Share  of  depreciation    

Share  of  steam    

Share  of  power  and  light     . . . 


Total  indirect  expense    

Total  office  expense    

Distribution    

Share   to  general  factory  expense,  %. 
Share  to  selling  expense,  % , 


19. 


MONTH  OP 


1,000.00 
250.00 
625.30 
346.82 
222.60 
450.70 
290.86 

178.90 

35.62 

75.84 

273.14 

240.00 

25.35 
15.42 


1.75 


17.27 

2.86 

989.25 

1.15 

.76 

61.42 

38.95 

29.89 


195.35 
8,184.60 


5,456.67 
2,727.93 


PERIOD  TO  DATE 


220 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


FiouEE  62. — Complete  Expense  Analysis  foe  a  Cutlery  Manufactueee 

(Conti7iued) 


No.  2 


A 

B 

C 

D 

E 

F 

G 

H 

I 

J 

K 

L 

M 

N 

O 

P 

Q 

R 
S 
T 
U 
V 

w 

X 

Y 

Z 

AA 

BB 

CC 

DD 

EE 

FF 

GG 

HH 

II 

JJ 

KK 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

S.S 

TT 

UU 

W 

WW 

XX 

YY 

ZZ 

AAA 


Driver's  wages 


Gasoline    

Oil    

Reserve  for  tire  replacement 
Accessories    


Outside  repairs 


Miscellaneous  supplies 
Miscellaneous  expense 
Millwright  labor     .  . . . 
Millwright  material    . 


Machine  shop  labor     . . 
Machine  shop  expense 
Machine  shop  material 


Share  of  group  life  insurance 
Share  of  liability  insurance     . 

Total  direct  expense   

Share  of  insurance    

Share  of  taxes    

Share  of  depreciation    


Total  indirect  expense 
Total  garage  expense    . 

Distribution    

(jeneral  factory  expense 

Selling   expense    

Steam    


Cost  per  iruck  hour 


$150.70 

15.76 

5.81 

75.50 

15.26 

47.82 


25.92 
19.44 
22.52 


.85 

2.50 

394.56 

12.10 

.49 

117.41 


PERIOD   TO  DATE 


130.00 

524.56 

Hours 

262.28 

105 

50% 

115.40 

46 

22% 

146.88 

58 

28% 

624.56 

209 

2.51 

DISTRIBUTION  OF  EXPENSE 


221 


Figure  62. — Complete  Expense  Analysis  for  a  Cutlery  Manufacturer 

(ContiTmed) 


MACHINE    SHOP 


Share  of  foreman's  wages 
Undistributed   labor    


Tool  steel    

Drills  and  reamers 
Abrasive  wheels    .  ., 
Cutting  compound 


Miscellaneous  supplies 
Miscellaneous  expense 
Millwright  labor     .  .  . . 
Millwright  material    . 


Share  of  group  life  insurance 
Share  of  liability  insurance     . 

Total  direct  expense   

Share  of  insurance    

Share  of  taxes     

Share  of  depreciation     

Share  of  steam     

Share  of  power  and  light     .  . . 


Total  indirect  expense    

Total  machine  shop  expense     .  . .  . 

Total  chargeable  labor     

Per  Cent  expense  to   labor   

Distribution     

Office    

Garage     

Steam    

Power  and  light   

Press   department    

Forge  department    

Heat  and  treating  department    .  .  . 
Machine  grinding  department   .  . . . 

Hand  grinding  department   

Blade  preparatory  department    .  .  . 
Spring  preparatory  department   .  . 

Covering  department    

Assembly  or  cutler's  department   . 

Hefting  department    

Finishing  department   

Buffing  department   

Cleaning  and  packing  department 


MONTH   OP 


$286.50 
258.92 


12.5.76 
82.76 
55.76 
12.46 


4.92 

18.85 

988.63 

3.84 

.85 

236.23 

31.16 

160.69 


432.77 

1,421.40 

1,872.56 

75.9 

Labor 

25.92 

76.49 

125.42 

552.87 

214.16 

82.46 

155.42 

32.17 

40.97 

26.49 

166.82 

115.42 

72.92 

82.67 

87.14 

15.22 

$1,872.56 


PERIOD  TO  DATE 


Expense 

$19.44 
57.37 
94.06 

420.80 

162.55 
62.59 

117.96 
24.42 
31.09 
20.11 

127.62 
87.60 
55.35 
62.75 
66.14 
11.55 
$1,421.40 


222 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


FiGUBE  62. — Complete  Expense  Analysis  for  a  Cutlery  Manufacturer 

(Continued) 


Xo.  4 


A 
B 

c 

D 
E 
F 
G 
H 
I 
J 
K 
L 
M 
N 
O 
P 
Q 

R 

S 

T 

U 

V 

W 

X 

Y 

Z 

AA 

BB 

CC 

DD 

EE 

FF 

GG 

HH 

II 

JJ 

KK 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

SS 

TT 

UU 

\'V 

WW 

XX 

YV 

7.Z 

AAA 

BBB 


Fireman's  wages 
Coal     


Miscellaneons  supplies 
Miscellaneous  expense 
MUlwrig-ht  labor     .  . .  . 
Millwright  material    . 


Machine  shop  labor     . . 
Machine  shop  expense 
Machine  shop  material 


Share  of  group  life  insurance 
Share  of  liability  insurance    . 

Total  direct  expense   

Share  of  insurance    

Share  of  taxes 

Share  of  depreciation    , 


Share  of  garage 


Total  steam  expense   

Distribution    

Power    78.0% 

Office    l-59f 

Machine   shop    1.2% 

Press     1-8% 

Forge    1.1% 

Heat  treating   1.4% 

Machine  grinding   2.8% 

Hand   grinding    1.8% 

Blade   preparatory    1.2% 

Spring   preparatory    8% 

Covering    1.4% 

Assembly     2.7%, 

Hefting     1-2% 

Finishing    1.4% 

Buffing     8% 

Cleaning  and  packing 9% 


MONTH    OP 


$275.76 
1,875.42 


76.42 

32.74 
16.49 

76.49 
57.37 
22.84 


3.47 

1,937.85 

19.23 

.49 

492.42 


146.88 

2,596.87 

2,025.56 
38.95 
31.16 
46.74 
28.57 
36.36 
72.71 
46.74 
31.16 
20.77 
36.36 
70.11 
31.16 
36.36 
20.79 
23.37 


PERIOD    TO    DATE 


$2,596.87 


DISTRIBUTION  OF  EXPENSE 


223 


Figure  62. — Complete  Expense  Analysis  fob  a  Cutlery  Manufacturer 

(Continued) 


Cylinder  oil 
Engine  oil    . 


Miscellaneous  supplies 
Miscellaneous  expense 
Millwright  labor  .... 
Millwright  material    . 


Machine  shop  labor     .  . 
Machine  shop  expense 
Machine  shop  material 


LIGHT    AND    POWER 


Engineer's   salary 


Share  of  group  life  insurance 
Share  of  liability  insurance     . 

Total  direct  expense   

Share  of  insurance     

Share  of  taxes    

Share  of  depreciation    


Share  of  steam    

Share  of  garage    

Total  indirect  expense   

Total  light  and  power  expense 

Distribution    

Power  and  light    

Kilowatt-hours,   light    

Kilowatt-hours,   power    

Total  kilowatt-hours   

Cost  per  kilowatt  hour    

Distribution  light    

Office     10% 

Machine  shop    5% 

General   factory    14% 

Press  department    5% 

Forge    department    2% 

Heat  treating  department    4% 

Machine   grinding    department    3% 

Hand  grinding  department    5% 

Blade  preparatory   department    6% 

Spring  preparatory   department    5% 

Covering  department    7% 


MONTH   OP 


$200.50 


35.67 
42.80 


46.94 

3.5.76 
15.90 

125.42 
94.06 
76.47 


1.55 
5.62 

680.69 

4.72 

.49 

502.45 


2,025.56 


2,533.22 
3,213.91 


7,598 
74,577 
82,175 
$0.J385 

$29.89 
14.94 
41.84 
14.94 

5.98 
11.96 

8.97 
14.94 
17.93 
14.94 
20.92 


PERIOD   TO  DATS 


224 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  62.- 


-CoMPLETE  Expense  Analysis  for  a  Cutlery  Manufacturer 
(Contimied) 


P 

G 

H 

I 

J 

K 

L 

M 

N 

O 

P 

Q 

R 

S 

T 

U 

V 

W 

X 

Y 

Z 

AA 

BB 

CC 

DD 

EE 

FF 

GG 

HH 

II 

JJ 

KK 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

SS 

TT 

UU 

vv 

WW 

XX 

YY 

ZZ 

AAA 


Assembly  or  cutler's  department   12% 

Hefting   department    6% 

Finishing  department   7% 

Bui&ng  department    5% 

Cleaning  and  packing  department 4% 


Power  distribution    

Machine  shop   

Press  department    20% 

Forge  department   6% 

Heat  treating  department   3% 

Machine  grinding  department 10% 

Hand  grinding  department       5% 

Blade  preparatory  department    4% 

Spring  preparatory  department 4% 

Covering   department    6% 

Assembly  or  cutler's  department   7% 

Hefting     10% 

Finishing    12% 

Bufllng     8% 

Cleaning  and  packing 


LIGHT  AND  POWER — Continued 


Summary  distribution  light  atid  power 

Office    

Machine  shop   

General  factory   

Press  department    

Forge  department    

Heat  treating  department   

Machine  grinding  department   

Hand  grinding  department    

Blade  preparatory  department 

Spring   preparatory  department    

Covering   department    

Assembly     

Hefting     

Finishing    

Buffing    

Cleaning  and  packing    


MONTH  OP 


PERIOD  TO  DATB 


$35.88 
17.93 
20.93 
14.94 
11.98 


$298.89 

145.75 

583.00 
174.90 
87.45 
291.51 
145.75 
116.60 
116.60 
174.91 
204.05 
291.50 
349.80 
233.20 


$2,915.02 

29.89 
160.69 

41.84 
597.94 
180.88 

99.41 
300.48 
160.69 
134.53 
131.54 
195.8S 
239.93 
309.43 
370.73 
248.14 

11.96 


$3,213.91 


DISTRIBUTION  OF  EXPENSE 


225 


Figure  62. — Complete  Expense  Analysis  for  a  Cutlery  Manupactueer 

(CantiTmed) 


No.  6 


a 

B 

C 
D 
E 
F 
G 
H 
I 
J 
K 
L 
M 
N 
O 
P 
Q 
R 
S 
T 
U 
V 

w 

X 

Y 

Z 

AA 

BB 

CO 

DD 

EE 

FF 

GO 

HH 

II 

JJ 

KK 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

SS 

TT 

UU 

vv 

WW 
XX 

YY 
ZZ 
AAA 


GENERAL  FACTORY 


Share  of  administrative  salary 

Superintenaent's   salary    

Timekeeping  clerical   salary    . 

Stock   room   wages    

Receiving   room   wages    

Watchmen's  wages    

Nurse  and   hospital  wages    . . 
Hospital  expenses   


Miscellaneous  supplies 
Miscellaneous  expense 
Millwright  labor     . . .  . 
Millwright  expense     .  . 


Machine  shop  labor     .  . 
Machine  shop  expense 
Machine  shop  material 


Share  of  group  life  insurance 
Share  of  liability  insurance    . 

Total   direct   expense    

Share  of  insurance    

Share  of  taxes    

Share  of  depreciation    

Share  of  office  expense    

Share  of  steam     

Share  of  power  and  light    . . . 
Share  of  garage     


Total  indirect  expense   

Total  general  factory  expense    .  . . 

Distribution    

Press   department    '. 

Forge   department    

Heat  treating  department   

Machine   grinding   department    .  . . 

hand  grinding  department    

Biade  preparatory   department    .  .  . 
Spring   preparatory   department    .  . 

Coverfng    department    

Assembly  or  cutler's  department    . 

Hefting   department    

Finishing  department   

Buffing  department    

Cleaning  and  packing  department 


19 


MONTH   OP 


PERIOD   TO  DATE 


$10,000.00 

550.00 
750.50 
952.80 
490.60 
307.10 
250.75 
187.72 


172.46 


47.82 
24.90 


19.48 


8.72 

10.46 

13,773.31 

119.91 

7.23 

764.70 

5,456.67 

41.84 

262.28 

6,652.63 

20,425.94 

Amount 

Hours 

$2,153.54 

16,570 

692.11 

5,328 

349.95 

2,694 

868.47 

6,678 

7o0.69 

5,856 

1,613.42 

12,412 

817.16 

6,283 

3,321.86 

25,564 

4,478.91 

34,472 

1, -.06.23 

10,817 

2,225.77 

17,126 

943. d8 

7,258 

793.95 

6,ii2 

$20,425.94 

157,170 

226 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  62. 


-Complete  Expense  Analysis  for  a  Cutlery  Manufacturer 
(Continued) 


PHESS    DEP.IRTMENT 

19 

No.  7 

MONTH    OF 

I'KltlOD    TO   DATE 

A 

$178.92 
492.86 

B 

Undistributed  setting-up  labor    

C 

D 

E 

Belting    

28.92 

F 

G 

H 

I 

J 

Miscellaneous   labor    

576.67 
982.14 

K 

Production   bonus    

L 

M 

Miscellaneous  supplies    

170.46 

N 

Miscellaneous  expense    

0 

26.72 
12.14 

P 

Millwright  material     

Q 

R 

Machine  shop  labor     

.552.87 

s 

420  80 

T 

123.48 

U 

V 

w 

3.75 

12.22 

3  587  95 

X 

Y 

Z 

20.49 

2.35 

2,174.13 

46.74 
597.94 

AA 

BB 

CO 

DD 

EE 

Share  of  general  factory     

2,153.54 

FF 

GO 

HII 

4,995.19 

II 

8.583.14 

JJ 

Total  productive  labor     

8,246.52 
102.8% 

KK 

Per  cent  expense  to  productive  labor   

LL 

MM 

NN 

00 

PP 

QQ 

RR 

ss 

TT 

UU 

VV 

WW 

XX 

YY 

ZZ 

AAA 

Average  hourly  earnings   

.56 

DISTRIBUTION  OF  EXPENSE 


227 


Figure  62, — Complete  Expense  Analysis  for  a  Cutlery  Manufacturer 

(Contmued) 


FORGE    DEPAUTMENT 

19 

No.  8 

MONTH   OK 

PERIOD   TO  DATE 

A 

$170.82 

B 

C 

D 

Gas   for   heating   furnaces    

196.75 

E 

Belting    

25  42 

F 

Fire  brick  and  clay   

55.96 

Cr 

H 

24  92 

I 
J 

298.87 
457.27 

K 

L 

M 

15  38 

N 

Miscellaneous  expense    

0 

49  86 

p 

18  42 

Q 

R 

Machine  shop  labor     

214.16 

s 

162  55 

T 

Machine  shop  material    

17.48 

U 

V 

w 

9  76 

X 

3915 

Y 

1,756.77 
5.65 
1.62 

335  R7 

z 

aa 

BB 

CO 

28.57 

DD 

EE 

FF 

GG 

HH 

1,244.70 
3  001  47 

11 

JJ 

Total  productive  labor 

3,137.42 

KK 

96% 

LL 

MM 

NN 

GO 

PP 

QQ 

RR 

SS 

TT 

UU 

vv 

WW 

XX 

YY 

ZZ 

AAA 

.671 

228 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


FiGUBE  62. — Complete  Expense  Analysis  foe  a  Cutlery  MANUFACximEB 

(Continued) 


No.  9 


A 

B 

C 

D 

E 

F 

G 

H 

I 

J 

K 

L 

M 

N 

O 

P 

Q 

R 

S 

T 

U 

V 

X 

Y 

Z 

AA 

BB 

CC 

DD 

EE 

FF 

GG 

HH 

II 

JJ 

KK 

LL 

MM 

NN 

GO 

PP 

QQ 

RR 

SS 

TT 

uu 
vv 

WW 

XX 

YY 

ZZ 

AAA 


HEAT    TREATING    DEPARTMENT 


Foreman's    wages    

Lead     

Gas  for  heating 

Charcoal     

Fire  brick  and  clay    

Tempering  oil    

Pyrometer  fire   ends    

Hardening  pots  and  annealing  boxes   

Miscellaneous  labor 

Miscellaneous  supplies    

Miscellaneous  expense     

Millwright  labor    

Millwright  material    

Machine  shop  labor     

Machine  shop  expense     

Machine  shop  material     

Share  of  group  life  insurance     

Share  of  liability  insurance     

Total  direct  expense   

Share  of  insurance    

Share  of  taxes    

Share  of  depreciation    

Share  of  steam    

Share  of  power  and  light    

Share  of  general  factory    

Total  indirect  expense    

Total  heat  treating  department  expense     

Total  heat  treating  productive  labor    

Total  heat  treating  expense  and  productive  labor 

Distribution    

A    production - 1.5 

B    production 1.0 

C    production 8 

D    production 1.2 

E    production 9 

Total  unit  production    

Total  heat  treating  cost  per  unit     


19.. 


Average  hourly  earnings 


MONTH   OF 


$175.47 

15,27 
85.98 
7.56 
35.56 
19.42 
18.76 
32.76 
376.70 

19.67 

22.76 
11.48 

82.46 

62.59 

6.84 


6.76 

21.22 

1.001.26 

4.32 

1.38 

252.72 

36.36 

99.41 

349.95 


744.14 
1,745.40 
1,672.84 
3,418.24 
Actual 
12,768  doz. 
18,976    " 
7,586    " 
5,968    " 
9,749    " 


55,047 


PERIOD   TO  DATE 


Production 

Unit 
19,152  doz. 
18,976 

6,069 

7,162 

8,764 


60,123 
.057  doz. 


DISTRIBUTION  OF  EXPENSE 


229 


FiGUKE  62. — Complete  Expense  Analysis  for  a  Cutlery  Manufacturer 

(Continued) 


No.  10 


A 
B 
0 
D 

E 
F 
G 
H 
I 
J 
K 
L 
M 
N 
O 
P 
Q 
R 
S 
T 
U 
V 

w 

X 

Y 

z 

aa 

BB 

CC 

DD 

EE 

FF 

GG 

HH 

II 

JJ 

KK 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

SS 

TT 

UU 

VV 

WW 

XX 

YY 

ZZ 

AAA 


MACHINE   GRINDING    DEPARTMENT 


Foreman's  wages 


Belting    . . . . 
Ring  wheels 


Miscellaneoua  labor 
Production  bonus    . 


Miscellaneous  supplies 
Miscellaneous  expense 
Millwright  labor  .... 
Millwright  material    . 


Machine  shop  labor    . . 
Machine  shop  expense 
Machine  shop  material 


Share  of  group  life  insurance 
Share  of  liability  insurance    . 

Total  direct  expense   

Share  of  insurance    

Share  of  taxes    

Share  of  depreciation     

Share  of  steam    

Share  of  power  and  light    . . . 
Share  of  general  factory    .... 


Total  indirect  expense    , 

Total  machine  grinding   expense    - 

Total  machine  grinding  productive  labor 

Total  machine  grinding  expense  and  prod,   labor. 

Distribution    

Machine  hours   , 

Setting-up  hours    

Wheel  change  hours   

Other  lost  hours   

Productive  hours   

Total  machine   hours    

Per  cent  productive  machine  hours 

Total  cost  per  productive  machine  hour  


Average  hourly  earnings 


19. 


MONTH    OP 


$172.80 


15.22 
322.17 


101.50 
376.49 

36.76 

22.76 
15.46 

155.42 

117.96 

10.49 


15.47 

51.60 

1,414.10 

11.89 

1.94 

728.56 

72.71 

300.48 

868.47 


1,984.05 
3,398.15 
3,376.42 
6,774.57 


175 

156 

65 

5,692 

5,968 

94.5% 

$1.19 


.565 


PERIOD   TO  DATB 


230 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  62. — Complete  Expense  Analysis  foe  a  Cutlery  Manufactuber 

(Continued) 


HAND    GRIXDDfG    DEPARTMENT 

19 

No.  11 

MONTH    OF 

PERIOD  TO  OATI 

X 

$180.42 

B 

C 

D 

E 

Belting    

35.96 

F 

Emery   wheel    dressers    

15.22 

G 

350.00 

H 
I 

J 

175.92 
676.18 

15.48 

K 

l 

M 

N 

0 

14.22 

P 

Q 

R 

Machine  shop  labor     

32.17 

s 

24.42 

T 

Machine  shop  material    

6.48 

U 

V 

W 

Share  of  ^roup  life  insurance     

11.46 

X 

45.17 

1,583.10 

2.56 

1.33 

126.87 

y 

z 

AA 

BB 

CC 

46.74 
160.69 

DD 

Share  of  power  and  light    

EE 

760.69 

FF 

GG 

HH 

1,088.88 
2,6Bl.98 

II 

JJ 

4,679.13 

KK 

57.2% 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

ss 

TT 

UU 

VV 

WW 

XX 

YY 

ZZ 

AAA 

.91 

DISTRIBUTION  OF  EXPENSE 


231 


FiGUBE  62. — Complete  Expense  Analysis  for  a  Cutlery  Manufacturer 

(Continued) 


BLADE    PREPARATOIiV    DEPARTMENT 

19 

No.  12 

MONTH    OF 

PERIOD    TO   DATE 

\ 

$170.50 

B 

C 

D 

E 

Belting    

l"-,   9  9 

F 

Drills    

30.47 
22.7fi 
10.22 

276.80 
69.-). 45 

6. .59 

G 

Wheels     

H 

I 

J 

K 

L 
M 

N 

Miscellaneous  expense    

0 

Millwright  labor    

15.46 

P 

8  72 

Q 

K 

40.97 
31  09 

s 

T 

Machine  shop  material    

8.92 

U 

V 

w 

Share  of  group  life  insurance    

18.27 

X 

Share  of  liability  insurance     

92.46 

1,443.90 

3.18 

1.62 

157  01 

Y 

z 

AA 

Share  of  taxes    

BB 

CC 

Share  of  steam     

31.16 
134  53 

DD 

EE 

General  factory   

1,613.42 

FF 

GG 

HH 

Total  indirect  expense    

1,940.92 
3,384.82 

II 

Total   blade  preparatory  expense     

JJ 

Total  blade  preparatory  productive  labor     

6,258.76 

KK 

54% 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

SS 

TT 

UU 

vv 

WW 

XX 

YY 

ZZ 

AAA 

A  verage  hourly  earnings   

.56 

232 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  62. — Complete  Expense  Analysis  for  a  Cutlery  Manufacturer 

(Cotitinued) 


SPRING    PREPARATORY    DEPARTMENT 

19 

No.  13 

MONTH    OP 

PERIOD   TO  DATE 

A 
B 

$154.56 

C 

D 

E 
F 

10.28 

Drills    

47.76 

G 

Wheels     

H 

Tallow  sticks  

18.22 

I 
J 

Miscellaneous   labor    

156.47 

K 
L 
M 

N 

337.52 

8.74 

0 
p 

Millwright  labor      

14.22 

4.56 

Q 

ji 

26.49 

S 
T 

20.11 

14.20 

U 

V 

w 

9.76 

X 

47.82 

Y 

868.71 

Z 

3.29 

AA 

1.98 
1!53.30 

BB 

CC 

Share  of  steam    

20.77 

DD 

131.54 

EE 

817.16 

FF 

GG 

HH 

l.T28.n4 
1.996.75 
3,149.37 

II 

JJ 

Total  spring  preparatory  productive  labor    

KK 

63% 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

SS 

TT 

UU 

W 

WW 

XX 

YY 

ZZ 

AAA 

Averaffi    hourly  earnings   

.55 

DISTRIBUTION  OF  EXPENSE 


233 


Figure  62.- 


-CoMPLETE  Expense  Analysis  for  a  Cutlery  Manufactukee 
(Continued) 


COVERING    DEPARTMENT 


Foreman's  wages 


Saws 

Belting    , 

Drills    

Milling   cutters 


Miscellaneous  labor 
Production   bonus    . 


Miscellaneous  supplies 
Miscellaneous  expense 
Millwright  labor  .... 
Millwright  material    . 


Machine  shop  labor     . . 
Machine  shop  expense 
Machine  shop  material 


Share  group  life  insurance 
Share  liability  insurance    . 

Total  direct  expense   

Share  of  insurance    

Share  of  taxes   , 

Share  of  depreciation    . . . . 

Share  of  steam    , 

Share  of  power  and  light 
Share  of  general  factory    . , 


Total  indirect  expense    

Total  covering  department  expense    

Total  covering  department  productive  labor 
Per  cent  expense  to  productive  labor 


Average  hourly  earnings 


MONTH    OP 


$175.55 


22.30 
12.17 
42.17 
15.22 


286.94 
1,562.48 

17.47 

12.72 
8.97 

166.82 

127.62 

10.97 


19.76 

191.87 

2,673.03 

3.69 

1.86 

185.37 

36.36 

195.83 

3,321.86 


3,744.97 
6,418.00 
11,682.41 

55% 


PERIOD   TO  DATE 


.519 


234 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


FiGUKE  62. — Complete  Expense  Analysis  fob  a  Cutlery  Manutactuker 

{Continued) 


>'o.  15 


A 

B 

C 

D 

E 

F 

G 

H 

I 

J 

K 

li 

M 

N 

O 

P 

Q 

R 
S 
T 
U 
V 

w 

X 

Y 

Z 

AA 

BB 

CC 

DD 

EE 

FF 

GG 

HH 

II 

JJ 

KK 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

SS 

TT 

UD 

VV 

WW 

XX 

YY 

ZZ 

AAA 


ASSEMBLY    OR    CCTLEr'S    DEPARTICKKT 


Foreman's  \rages  

Belting    

Drills    

^NTieels     

Files    

Miscellaneous   labor    

Production   bonus    

Miscellaneous  supplies    

Miscellaneous  expense     

Millwright  labor    

Millwright  material    

Machine  shop  labor    

Machine  shop  expense    

Machine  shop  material     

Share  of  group  life  insurance     

Share  of  liability  insurance    

Total  direct  expense 

Share  of  insurance    

Share  of  taxes    

Share  of  depreciation    

Share  of  steam    

Share  of  power  and  light    

Share  of  general  factory    

Total  indirect  expense    

Total  assembly  department  expense    

Total  assembly  department  productive  labor 
Per  cent  expense  to  productive  labor   


Average  hourly  earnings 


MOSTH    OF 


1220.46 


15.76 

76.92 
25.96 

387.52 
2,478.91 

26.72 

10.47 
6.76 

11.5.42 
87.60 
22.84 


51.10 

255.17 

3,780.61 

7.18 

5.14 

299.82 

70.11 

239.98 

4.478.91 


5.101.04 

8,881.65 

20,762.18 

42.7% 


.678 


PERIOD    TO    DATB 


DISTRIBUTION  OF  EXPENSE 


235 


Figure  62. — Complete  Expense  Analysis  for  a  Cutlery  Manufacturer 

(Continued) 


HEFTING    DEPARTMENT 

19 

No.  16 

MONTH    OF 

PERIOD    TO   DATE 

A 

$175.40 

B 

0 

D 

E 

Belting    ;  . 

40.55      . 

F 

Sand  paper  and  cloth    

25.60 

G 

Wheels     

46.72 
18.92 

201.14 
828.96 

H 

I 
J 

Miscellaneous  labor    

K 

L 

M 

17.78 

N 

0 

Millwright  labor    

25.22 

P 

Millwright  material    - 

15.46 

Q 

R 

72.92 

s 

55.35 

T 

Machine  shop  material     

11.45 

U 

V 

w 

Share  of  group  life  insurance     

19.27 

X 

87.46 

Y 

1,642.20 

z 

3.86 

3.07 

151.84 

aa 

Share  of  taxes    

BB 

CC 

Share  of  steam    

31.16 
309.43 

DD 

EE 

1,406.23 

PP 

GG 

HH 

1,905.39 
3,547.79 
8,127.49 
43.5% 

II 

JJ 

KK 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

ss 

TT 

UU 

VV 

WW 

XX 

YY 

ZZ 

AAA 

Average  hourly  earnings   

.825 

236 


ESSENTIALS  OP  INDUSTRIAL  COSTING 


Figure  62. — Complete  Expense  Analysis  for  a  Cutlery  Manupactueee 

(Contiriued) 


FINISHING    DEPAKTMENT 

19 

No.  17 

MONTH   OF 

PERIOD   TO  DATE 

A 

$195.26 

B 

C 

D 

E 

Belting    

26.92 

F 

G 

Wheels     

15.27 

12.47 

15.96 

275.36 

897.29 

34.72 

H 

Tallow    sticks    

I 

J 

K 

L 
M 

N 

Miscellaneous  expense     

0 

12.14 
7.56 

p 

Q 

R 

Machine  shop  labor     

82.67 

s 

62  75 

T 

7.96 

U 

V 

w 

Share  of  group  life  insurance     

31.46 

X 

127  76 

Y 

1,805.55 

6.18 

2.87 

316.34 

Z 

AA 

Share  of  taxes    

BB 

CC 

Share  of  steam     

36.36 
370  73 

DD 

Share  of  power  and  light    

EE 

Share  of  general  factory    

2,225.77 

PF 

GG 

HH 

Total  indirect  expense     

2,958.25 

II 

4,763.80 

JJ 

11,942.78 

KK 

40% 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

SS 

TT 

UU 

vv 

WW 

XX 

YY 

ZZ 

AAA 

Average  hourly  earnings   

.75 

DISTRIBUTION  OF  EXPENSE 


237 


Figure  62. — Complete  Expense  Analysis  for  a  Cutlery  Manufacturer 

{Continued) 


BUFFING    DEPARTMENT 

19 

No.  18 

MONTH   OP 

PERIOD    TO   DATE 

A 

$182.50 

B 

C 

D 

E 

Belting    

14  29 

F 

Buffs    

35.76 

14.72 

8.92 

142.72 
482.93 

a 

H 

Tallow  sticks   

I 
J 

K 

L 

M 

18.44 

N 

Miscellaneous  expense    

0 

Millwright  labor    

18.42 
9.76 

P 

Millwright  material    

Q 

R 

Machine  shop  labor     

87.14 

S 

Machine  shop  expense     

66.14 

T 

Machine  shop  material    

5.86 

U 

V 

w 

14.72 
54.58 

X 

Share  of  liability  insurance     

Y 

1,156.90 

3.72 

2.35 

165.25 

Z 

AA 

Share  of  taxes    

BB 

cc 

Share  of  steam    

20.79 
248.14 
943.88 

DD 

EE 

Share  of  general  factory    

FF 

GG 

HH 

Total  indirect  expense    

1,384.13 

II 

Total  huffing  department  expense    

2,541.03 

JJ 

Total  buffing  department  productive  labor    

4,378.46 

KK 

Per  cent  expense  to  productive  labor   

58% 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

SS 

TT 

UU 

VV 

WW 

XX 

YY 

ZZ 

AAA 

Average  hourly  earnings   

.67 

238 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


FiGUKE  62. — Complete  Expense  Analysis  for  a  Cutlery  Manufacturer 

(Continued) 


CLEANING    AND    PACKING    DEPARTMENT 

19 

No.  19 

MONTH    OF 

PERIOD    TO   DATE 

A 

Foreman's  wages   

$150.00 

B 

C 

D 

E 

F 

Wiping  cloths    

12.46 

G 

Wood    alcohol    

5.90 
4.76 

75.82 

H 

Oil    

I 
J 

Miscellaneous  labor 

K 

L 

M 

Miscellaneous  supplies     

15.27 

N 

Miscellaneous  expense     

0 

Millwright  labor    

2.75 

P 

Millwright  material    

.49 

Q 

R 

Machine  shop  labor     

15.22 

S 

Machine  shop  expense     

11.55 

T 

Machine  shop  material     

1.75 

U 

V 

w 

Shart  of  group  life  insurance     

14.73 
45.42 

X 

Share  of  liability  insurance     

Y 

Total  direct  expense   

356.12 

z 

Share  of  insurance    

2.14 

2.34 

78.38 

A  A 

Share  of  taxes     

BB 

Share  of  depreciation    

CC 

Share  of  steam    

23.37 
11.96 

DD 

Share  of  power  and  light    

EE 

Share  of  general  factory     

793.95 

FF 

GO 

HH 

Total  indirect  expense     

912.14 

II 

Total  cleaning  and  packing  department  expense. 

1,268.26 

.TJ 

Total  cleaning  and  packing  productive  labor.... 

2,176.43 

KK 

Per  cent  expense  to  productive  labor    

58% 

LL 

MM 

NN 

00 

PP 

QQ 

RR 

SS 

TT 

UU 

vv 

WW 

XX 

YV 

7.7. 

AAA 

.1  reragc  hourly  earnings   

.30 

DISTRIBUTION  OF  EXPENSE 


239 


Figure  62. 


-Complete  Expense  Analysis  for  a  Cutlery  Manufacturer 
(Conti7iued) 


SELLING    EXPENSE 

19 

No.  20 

MONTH    OF 

PERIOD   TO   DATH 

A 

Share  of  administration   expense    

$10,000.00 

18,646.19 
8.972.42 

B 

Agents'  commissions   s . .  . 

c 

.\gents*  traveling  expense   

D 

E 

F 

Samples    

1,200.76 

G 

Credit    agency    

187.96 

H 

I 

J 

K 

L 

M 

Miscellaneous  .supplies     

N 

Miscellaneous  expense    

0 

P 

Q 

R 

S 

T 

U 

V 

W 

X 

Y 

Total  direct  expense   

39,007.33 

1.18 

.57 

61.43 

Z 

Share  of  insurance    

AA 

Share  of  taxes    

BB 

Share  of  depreciation    

CC 

BD 

Share  of  garage    i . . 

115.40 
2,727.93 

EE 

Share  of  office  expense 

FF 

GG 

HH 

Total  indirect  expense    

2,906.51 

41,913.84 

254,872.87 

ir 

Total  selling  expense     

JJ 

Total  sales    

KK 

Per  cent  selling  expense  to  sales   

16.5% 

189.642.16 

22.2% 

LL 

Total  cost  of  sales   

MM 

Per  cent  selling  expense  to  cost  of  sales 

NN 

00 

PP 

QQ 

RR 

' 

SS 

TT 

UU 

VV 

WW 

XX 

YY 

ZZ 

AAA 

I  M  I  M  M 


I  I  M  I  I  IJ  I  I 


i  I  I   i   I  M 


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240 


DISTRIBUTION  OF  EXPENSE  241 

Proof  of  Closing-  Expense  Analysis.— Having  consid- 
ered the  nature  of  the  departmental  division  of  and  the 
structure  of  the  record  of  and  the  sources  of  entry  into 
the  Expense  Analysis,  the  discussion  of  this  working 
model  will  be  concluded  by  describing  the  method  of  clos- 
ing out  the  departments  of  the  Expense  Analysis.  The 
Expense  Analysis  must  prove  when  closed  out  with  the 
control  accounts,  known  as  Manufacturing  and  Selling 
Expense,  as  that  check  is  the  only  certain  way  of  deter- 
mining whether  the  expense  rates  correctly  include  all 
items  of  expenditure.  This  proof  is  accomplished  by  use 
of  the  proof  sheet,  Figure  63.  The  total  of  all  depart- 
ments equals  the  total  charges  to  the  Manufacturing  and 
Selling  Expense  control  accounts.  Then  when  the  con- 
tributing departments  are  prorated  or  distributed  over 
the  productive  departments,  the  accuracy  of  this  opera- 
tion is  ascertained  by  the  agreement  of  the  total  expense 
of  all  the  productive  departments  with  the  total  of  all 
departments  before  this  distribution.  Reference  to  the 
proof  sheet  will  show  the  total  of  the  departmental 
charges  to  Manufacturing  and  Selling  Expense  to  have 
been  as  follows : 

Payroll  (nonproductive  only) $68,470.11 

Supply  Requisition  Distribution 4,791.90 

Voucher  Register 11,419.90 

Group  life  insurance 260.43 

Liability  insurance 1,115.66 

Fire  insurance 240.23 

Taxes    40.73 

Depreciation   7,361.52 

Grindstone,  or  wheel  reserve 350.00 

Tire  reserve   75.50 

$94,126.07 

This  indicates  the  charges  to  both  contributing  and 
productive  departments  and  all  of  the  items  are  con- 


242  ESSENTIALS  OF  INDUSTRIAL  COSTING 

trolled  with  the  Ledger.  When  the  contributing  depart- 
ments have  been  closed  out  over  the  productive  depart- 
ments the  total  of  the  expense  of  the  productive  depart- 
ments should  be  the  same  as  the  original  charges.  Ref- 
erence to  the  proof  sheet  shows  the  final  expense  totals  of 
the  productive  departments  as  taken  from  the  Expense 
Analysis  and  proves  this  to  be  the  case. 

As  further  explanation  of  this  entire  operation  the 
Ledger  shown  in  Figure  73,  and  which  is  the  control  of 
the  Expense  Analysis  presented  herewith,  will  be  found 
to  contain  two  accounts,  Manufacturing  and  Selling  Ex- 
pense. These  accounts  are  the  controlling  accounts  and 
will  be  found  to  show  the  total  net  charges  as  follows : 

Manufacturing  Expense $52,212.23 

Selling  Expense 41,913.84 

Total  $94,126.07 

Method  of  Closing  Expense  Analysis.— The  sequence 
of  closing  out  the  contributing  departments  is  determined 
by  their  interrelation  or  the  degree  to  which  they  inter- 
lock. Where  contributing  departments  contain  recipro- 
cal charges,  one  to  the  other,  it  may  be  necessary  to  as- 
sume the  overhead  in  so  far  as  the  charges  to  the  other 
are  concerned  in  order  to  close  out.  The  small  error  thus 
involved  is  charged  over  the  remaining  charges  for  that 
department.  In  the  example  illustrating  this  discussion 
the  sequence  of  closing  out  is : 

Garage 

Steam 

Light  and  Power 

Machine  Shop 

Office 

General  Factory 

The  charges  to  Garage,  Steam,  Light  and  Power  De- 
partments from  the  machine  shop  were  made  by  esti- 


DISTRIBUTION  OF  EXPENSE  243 

mating  the  overhead  of  the  machine  shop  in  the  case  of 
the  three  departments.  This  was  necessary  because  the 
Machine  Shop  and  Power  Department  contain  reciprocal 
charges  and  neither  could  be  closed  out  without  the  other 
going  first  through  this  routine.  Whenever  this  condi- 
tion is  encountered  and  such  device  is  required,  it  will 
be  found  that  experience  and  the  accumulated  records 
make  it  possible  to  make  an  estimate  of  a  department 
overhead  with  close  approximation.  In  this  case  the 
overhead  rate  of  the  Machine  Shop  was  assumed  in  order 
to  compute  the  charges  to  the  Garage,  Steam  and  Power 
Departments  for  work  done  in  the  machine  shop.  The 
balance  of  the  expense  in  the  machine  shop  was  then  pro- 
rated over  the  remaining  departmental  repair  labor 
charges. 

The  Garage  Department,  as  the  first  department  to  be 
closed  out  regularly,  is  totaled.  Its  expense  is  charged 
according  to  the  record  of  truck  activity  to  general  fac- 
tory, selling  expense  and  steam  department.  General  fac- 
tory constituting  inbound  freight  hauling;  selling  ex- 
pense, outbound  freight;  and  hauling  and  steam  depart- 
ment, the  hauling  of  coal  and  ashes. 

The  Steam  Department  is  totaled  and  distributed  ac- 
cording to  the  power  demand  and  the  thermal  value  in 
the  exhaust  steam  as  used  for  heating.  The  calculation 
on  which  such  a  distribution  is  based  has  been  explained 
in  Chapter  VIII. 

The  Power  Department  is  totaled  and  charged  accord- 
ing to  the  horsepower  demand  of  the  various  depart- 
ments, as  discussed  in  Chapter  VIII. 

The  Machine  Shop  will  be  found  complete  after  these 
preceding  departments  have  been  dealt  with  and  is  closed 
out  by  prorating  the  expense  according  to  labor  charges, 
but  only  using  the  balance  remaining  after  the  amounts 


244  ESSENTIALS  OF  INDUSTRIAL  COSTING 

first  charged  into  Garage,  Steam  and  Power  Depart- 
ments, as  explained  just  previously,  have  been  deducted. 

Office  expense  is  then  totaled  and  distributed  two- 
thirds  to  general  factor}^  and  one-third  to  selling  expense. 
This  division  was  based,  in  this  case,  upon  the  determined 
facts  that  service  was  rendered  to  the  two  departments 
in  those  proportions. 

General  Factory  can  now  be  totaled  and  the  expense 
of  this  department  is  charged  over  the  productive  depart- 
ments on  the  basis  of  the  productive  hours  in  these  de- 
partments. The  pro  and  con  arguments  for  this  basis  of 
division  have  been  considered  prior  in  this  chapter  and 
the  example  selected  has  utilized  the  hour  basis. 

When  the  contributing  departments  are  thus  closed 
out,  the  next  step  is  to  total  the  expense  of  the  productive 
departments  as  finally  recorded,  which  has  been  done. 

The  whole  process  of  closing  out  of  the  Expense  Analy- 
sis is  exceedingly  difficult  to  describe,  but  it  is  believed 
the  explanation  given,  if  carefully  followed  and  supported 
by  study  of  the  Analysis  itself,  will  result  in  a  working 
conception  of  the  steps  and  method  of  compiling  and 
closing  the  record. 

Normal  and  Abnormal  Expense.— So  much  for  the 
methods  of  applying  expense  in  costs,  but  the  subject 
cannot  be  dismissed  without  adequate  consideration  of  an 
important  and  rather  involved  phase  of  the  problem.  The 
first  demonstration  of  the  monthly  accumulation  of  ex- 
pense rates  by  departments  will  reveal  that  the  rates  of 
each  department  vary  somewhat  each  month  and  if  the 
business  is  highly  seasonal  the  variations  will  be  noted  to 
complete  a  cycle.  This  occurrence  must  be  recognized 
and  proper  provision  made  therefor.  The  cause  for  this 
may  be  seen  by  mention  of  the  clothing  industry  which  is, 
unless  regulated  by  judicious  policy,  of  a  highly  seasonal 


DISTRIBUTION  OF  EXPENSE  245 

character  with  a  large  percentage  of  the  demand  concen- 
trated in  a  very  few  months.  It  will  be  recognized  that  a 
large  portion  of  factory  expense  is  inflexible  and  quite 
fixed  by  nature  and  hence  during  the  inactive  season  the 
ratio  to  productive  labor  is  higher  than  in  the  rush  sea- 
son. This  same  condition  is  experienced  in  lesser  degree 
in  most  businesses  and  sometimes  is  occasioned  by  the 
seasonal  fluctuations  of  the  labor  supply. 

It  is  obvious  that  if  goods  were  costed  with  current 
actual  overheads,  they  would  diifer  materially  according 
to  the  period  of  the  year  in  which  they  were  figured,  due 
to  the  variations  in  overhead  rates.  This  is  a  condition 
disruptive  to  price  policies  and  manufacturing  control 
and  some  basis  of  reducing  its  effect  and  still  assuring  the 
inclusion  in  costs  of  every  dollar  expended  is  imperative. 
The  manner  in  which  this  is  done  is  quite  simple  if  once 
understood.  The  expense  rates  over  the  same  period  are 
studied  through  the  course  of  several  years  and  the  char- 
acter of  the  cycle  is  established.  Then  starting  with  the 
current  rates  a  normal  rate  is  established,  which  is  pre- 
sumed to  represent  the  composite  for  the  entire  year. 
The  divergence  of  the  actual  rates  from  this  normal 
rate  is  computed  monthly  and  the  difference  in  money 
value  is  recorded  in  a  special  account  provided  for  that 
purpose  and  which,  in  my  practice,  has  been  called  an 
Abnormal  Business  account. 

In  further  explanation  of  this  matter  there  is  pre- 
sented a  concrete  case  (Figure  64)  which  shows  the 
method  of  calculating  the  difference  between  the  normal 
and  actual  rates.  Of  course,  the  normal  expense  rates 
are  used  in  figuring  costs,  but  the  Ledger  must  reflect 
the  current  and  cumulative  differences  between  the  total 
normal  and  actual  expense.  The  normal  expense  is  as- 
certained by  applying  the  normal  rate  to  the  productive 


246 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  64. — Determination  of  Excess  or  Insufficient  Actual 
Expense  Compared  with  Normal^ 


Department 

Actual  Rate 

Actual 
Expense 

Normal 
Rate 

Normal 
Expense 

7.  Press 

102.8  per  cent 
96     per  cent 
$0,057 
_^  $1.19 
57.2  per  cent 
54.9  per  cent 
63     per  cent 
55     per  cent 
42.7  per  cent 
43.5  per  cent 
40     per  cent 
58    per  cent 

58    per  cent 

$8,583.14 
3,001.47 
1,745.40 
3,398.15 
2,681.98 
3,384.82 
1,996.75 
6,418.00 
8,881.65 
3,547.79 
4,763.80 
2,541.03 

1,268.26 

So  per  cent 
90  per  cent 

$0,065 

$1.05 
55  per  cent 
60  per  cent 
60  per  cent 
55  per  cent 
50  per  cent 
40  percent 
45  per  cent 
65  per  cent 

55  per  cent 

$7,009.54 

8.  Forge   

2,823.68 

9.  Heat  Treating. . . 

10.  Machine  Grinding. 

11.  Hand  Grinding. . . 

12.  Blade  Preparation 

13.  Spring  Preparation 

14.  Covering  

15.  Assembly   

16.  Hefting    

17.  Finishing 

18.  Buffing  

19.  Cleaning  and 
Packing 

2,069.45 
3,795.06 
2,573.52 
3,755.26 
1,889.62 
6,425.33 
10,381.09 
3,251.00 
5,374.25 
2,846.00 

1^97.04 

Total    

$52,212.24 

$53,390.84 
52,212.24 

$1,178.60 

*  In  this  example  the  normal  expense  is  greater  than  the  actual,  and  hence 
a  credit  to  Abnormal  Business  is  developed. 


labor  as  indicated  in  the  example.  The  normal  expense, 
according  to  this  computation  is  $53,390.53,  while  the 
total  actual  is  $52,211.93,  showing  that  the  normal  ex- 
pense is  $1,178.60  greater  than  the  actual.  The  Journal 
entries  which  would  reflect  this  difference  would  be: 

Dr.  Goods  in  Process $1,178.60 

Cr.  Abnormal  Business $1,178.60 

These  Journal  entries  indicate  that  actual  expense  is 
higher  than  normal  for  the  year  and  that  the  normal 
amount  is  charged  into  process  and  the  difference  into  the 
Abnormal  Business  account.  This  account  is  credited 
whenever  the  actual  expense  becomes  less  than  the  nor- 
mal, as  would  occur  in  the  peak  season,  and  if  the  rates 


DISTRIBUTION  OF  EXPENSE  247 

are  well  set,  the  account  should  balance  at  the  end  of  the 
year.  If  it  does  not,  the  difference  is  written  off  through 
profit  and  loss. 

The  connection  of  this  matter  of  normal  expense  rates 
and  the  accounting  of  them  with  the  Ledger  control  of  a 
modern  system  of  costs  and  statements  is  shown  in  Chap- 
ter XI.  The  costing  of  expense  is  usually  the  crux  of  ac- 
curacy and  the  principles  of  procedure  must  be  under- 
stood if  success  is  to  be  reached.  It  is  hoped  that  this 
chapter  has  been  conducive  to  that  end. 


CHAPTER  X 

FINAL  COSTING 

Finis  opus  coronat. 

The  costing  of  labor,  material,  and  expense  as  indi- 
vidual elements  has  been  discussed  and  their  union  in 
final  costs  will  now  be  presented. 

Final  Costs  in  Assembly  Industry.— Happily  this  phase 
of  costing  contains  few  difficulties  if  the  preliminary 
measures  in  obtaining  labor  and  material  and  expense 
costs  have  been  properly  devised  and  executed.  Comput- 
ing a  final  cost  is  a  summary  operation  compared  to  the 
detail  in  the  collection  of  the  data  which  precedes  it  and 
on  which  it  is  based.  The  form  of  final  costing  is  gov- 
erned by  the  character  of  the  product  and  may  be  done 
in  stages  leading  to  the  last  result.  For  instance,  in 
machinery  costs,  or  in  fact  in  any  assembly  manufacture, 
the  parts  are  costed  first,  then  sub-assemblies,  and  finally 
the  complete  assembly.  The  sub-assembly  cost  is  derived 
by  adding  to  the  cost  of  the  parts  entering  it  the  labor 
and  expense  of  the  operations  involved  in  its  making  and 
the  final  assembly  is  costed  by  adding  to  the  cost  of  the 
individual  parts  and  sub-assemblies  the  labor  and  expense 
of  the  final  assembly  operations. 

Final  Costs  in  Continuous  Industry.— In  continuous  in- 
dustries the  process  rates  per  unit  of  production  are  mul- 
tiplied by  the  particular  quantity  to  determine  the  final 
cost.  Of  course,  the  finished  product  is  a  net  quantity 
and  the  balance  remaining  after  the  losses  or  waste  of  the 
process  have  been  deducted.  As  an  instance  of  this  re- 

248 


FINAL  COSTING  249 

quirement  in  costing  let  us  assume  a  cordage  plant  where 
the  rope  uses  a  yarn  of  certain  size  and  quantity  per 
hundred  pounds  of  rope.  The  yam  was  the  net  yield  of 
the  processes  needed  for  its  conversion  from  fiber.  Each 
state  was  accompanied  by  a  waste  of  fiber.  Take  an 
operation  on  the  yarn,  the  labor  and  expense,  cost  of 
which  was  $0,158  per  pound  with  a  waste,  subsequent  to 
this  operation  and  the  completion  of  the  yarn,  of  5  per 
cent.  The  equivalent  cost  of  this  operation  in  finished 
yam  would  then  be : 

$0,158  $0,158 


100  per  cent  —  5  per  cent  95  per  cent 

=     $0,166  per  pound  of 
finished  yarn 

Examples  of  Final  Costs. — As  example  of  the  collection 
of  assembly  product  costs  the  methods  used  in  the  cost- 
ing of  a  pocket  knife  have  been  selected.  A  pocket  knife 
consists  of  parts,  such  as  blades  and  springs,  and  of  sub- 
assemblies, such  as  the  handle.  Conforming  to  the 
methods  mentioned  earlier  in  the  chapter,  the  blades, 
springs,  and  parts  entering  the  sub-assembly  are  listed 
separately,  as  shown  in  Figures  65  A  and  B.  The  sub-as- 
sembly consists  of  scale  and  a  covering,  the  latter  gen- 
erally purchased  ready  for  attachment.  The  costing  of 
the  knife  handle  sub-assembly  is  illustrated  in  Figure 
65C.  The  final  assembly  and  the  finishing  operations  on 
the  pocket  knife  are  collected  in  the  form  shown  in 
Figure  65D. 

In  further  illustration  of  final  cost  forms,  Figures  66^ 
67  and  68  are  shown.  These  forais  were  used  in  a  variety 
of  conditions  and  may  contain  ideas  applicable  to  the 
particular  requirements  of  a  given  industry.  The  accu- 
mulation of  a  final  cost  presupposes  the  existence  of  accu- 


PAR 

PART  NAME        Pt^^f^ 

T  COST  CARD 

e>-Z.c^J^                       PART  NO.          ^^^ 

KIND  OF  MATERIAL       b^,^..^^^p| 

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261 


SUBASSEMBLY    COST   CARD 

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J-i<..uJLJ^                     So 

o  <S 

o  \-S 

TOTAL  PER  3„    /^ 

1 

ii<=l 

FiGUBE    65C SUB-ASSEMBLY    COST    CARD 

252 


FINAL   COST 

CARD 

KNIFE  NO.  ^  ^  ^  ^  ^^ 

DETAIL 

COST  OF      ^^^^ 
PARTS     HDEPT. 

PIRCENT 
EXPENSE 

LABOR 

EXPNSE 

|total 

P/^a£^'^   iM-<? 

S-yU 

/2^    ••       q^fi 

s^-\ 

J-Z/t-A^^^-o.  O                   «?  f-^ 

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1 

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U 

^ivy  y-a   . 

y^f. 

r^ 

L,n- 

PUTTING  UP 

."^ 

is< 

ffio 

H-H-^ 

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HEFTING 

^7-^1 

fno'fo 

ZS^ 

M-5.i 

txfe 

FINISHING  j^^vyi 

M-3.a 

i^S'T^ 

IH-jf 

Jn^ 

f.^^ 

WHITENING 

^^ 

fi-So'fo 

03% 

ocjS' 

'J3 

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n 



1     TOTAL  PEE  DOZ. 

^ 

4-M-f 

1, 

1 

■  1 



FlQlTKE   65D. — FINAL  COST   CAED 

253 


254         ESSENTIALS  OF  INDUSTRIAL  COSTING 

rate  and  detailed  information  as  to  raw  materials  used, 
price  records  thereof,  unit  labor  costs,  and  overhead 
rates.  With  these  data  available  the  final  cost  is  only  a 
matter  of  straight  computation.  Of  course,  the  work 
must  either  be  done  or  super\dsed  by  some  one  familiar 
with  the  technical  nature  of  the  product  and  as  well 


,  ,  , 

FINAL   COST    SHEET 

KINO 

VomM 

Rile 

Vtloe     1    Rnte 

VlllUI       1       JUU! 

V.lno 

RiU 

V.™     1 

R«bi 

Val» 

Total  Material  Cost 

1 

. 

-      Ubor 

E.p.n«  \         T.,.l 

v.i™. 

V,.      1 

..,„ 

V... 

V.,.      \      v.,„       1 

MkLpHmI  rn<)t 

Weavinit 

1 

1 

Total  Cnrt.  W«ivin»  Yds. 

fi^illinf  *n<1  Hrvinf 

H    FiiiiFihinit  flnH  Packinit 

1 

SelliiiB  FTD<.nM 

ToTAi.  Cost 

\ 

— 

FlGUBE    66. — FINAL    COST    SHEET 


reasonably  conversant  with  approximate  cost  ranges. 
This  knowledge  guards  against  mistakes  which,  unless 
otherwise  prevented,  are  apt  to  be  grotesque.  I  have  seen 
costs  in  which  errors  had  been  made  umvittingly  and 
which  would  have  been  apparent  to  any  one  but  a  tyro 
by  the  absurdity  of  the  result,  and  can  assure  the  reader 


FINAL  COSTING 


255 


that  it  is  an  advantage  to  have  final  costs  computed  by 
an  intelligence  seasoned  with  specific  experience  in  the 
given  line. 

Handling  Fluctuations  in  Final  Costs.— The  computa- 
tion of  a  final  cost  can  hardly  be  enlarged  beyond  this 


ARTin  F 

FINAL 

COST   ^HEET 

PINISHPIVWFir.HT 

0«T 

PURCHASED     PARTS                       | 

rART 

„.<c»m™» 

.„..„,„ 

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! 

V.,,. 

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. — 

_ 

— 

— 

J 



— 

_ 

— 

_ 



_ 

— 



- 

Figure  67. — final  cost  sheet 


point  without  entering  a  discussion  on  elementary  mathe- 
matics and  the  treatment  in  this  volume  will  rest  at  this 
point.  However,  there  is  a  vitally  important  phase  to 
final  costing  which  cannot  be  overlooked  and  that  pertains 
to  the  connection  with  statements  of  operation,  the  topic 
of  the  next  chapter.  In  the  preparation  of  statements  of 
operation  or  profit  and  loss  it  is  necessary  to  deduct  from 


1  C 

1    7 

6< 

_    i 

2     "^ 

•t 

5  ?'  i  1 1 . 
1 1  _-  ^  -  ^  1 
•3  =  2         i 

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s 

1 

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li 

H^ 

1 

'-1 

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1 

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1 

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s 

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3 

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6 

u          i                     >    S    5    3    ^    >S 

256 


FINAL  COSTING 


257 


the  billing  value  of  sales  the  cost  value  of  the  commodi- 
ties represented  therein.  The  cost  of  a  given  article  may- 
vary  considerably  during  the  year  and  in  the  case  of  some 
industries  where  raw  material  ranges  through  wide  price 
fluctuations  and  is  a  high  factor  in  total  costs  as  in  cor- 
dage or  rubber  tire  or  knitwear  industries,  the  ditferences 


Smect                        Cost  of  Bottles  Shippeo 

I9t__ 

=  = 

•»"- 

ii 

....... 

r^ 

= 1! 

■7::r 

- I!.i:v. 

.......      1^;.., 

- 1 

•HH 

rz 

— 

1 

' 

i; 

FiGUKE  69. — COST  OF  BOTTLES  SHIPPED 


in  costs  of  the  same  article  through  the  operating  period 
are  substantial. 

Since  it  is  the  fundamental  axiom  of  cost  procedure 
that  costs  ultimately  must  represent  every  dollar  of  ex- 
penditure, it  is  obvious  that  these  variations  in  costs  are 
proper  reflections  of  financial  activities  and  if  the  profit 
is  to  be  correctly  represented,  proper  adjustments  must 
be  made  in  order  to  determine  the  actual  cost  of  goods 


258 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


PUAMT  r4o l40Hn4 191 

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1^. 

marrx^m 

X. 

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1 1  n  1 1 1  1 '  1 1  i  I  1 1 1 1 1 1 1 

lllllil  lillii  llillll 

_. 

l_ 

FiGUKE    70. — COST   OF    BOTTLES    MADE 


sold.  This  requirement  is  met  quite  similarly  to  the 
method  used  in  pricing  raw  material,  and  is  illustrated 
herewith.  Figure  69  shows  the  stock  record  kept  of 
finished  goods  and  the  shipments  from  and  additions  to 
during  the  month.  The  particularly  interesting  and 
economical  feature  of  this  fonn  is  in  the  provision  it 
makes  for  totaling  the  column  marked  ''shipped,"  thus 
furnishing  the  total  cost  of  goods  shipped  directly  from 
what  is  virtually  a  stock  record  of  finished  goods.  Figure 
70  is  the  form  used  in  connection  with  the  above  to  deter- 
mine the  monthly  cost  of  production  and  it  will  be  ob- 
served that  it,  too,  provides  for  checking  of  totals  with 
other  summary  records  as  proof  of  accuracy  of  the  costs 
represented.  For  instance,  the  total  of  the  column  pro- 
duction good  and  bad  must  check  with  the  production 


FINAL  COSTING 


259 


L._ir Ljj 1 — h-TTT 


Figure  70. — cost  of  bottles  made 


reports  covering  those  items,  the  value  of  mixing  mate- 
rials must  check  with  the  stock  records  for  those  mate- 
rials, etc. 

As  further  illustration  of  the  manner  of  handling  fluc- 
tuating production  costs  through  cost  of  sales  in  order  to 
represent  profit  properly  Figure  71  is  presented.  This 
applies  to  cordage  manufacture  where  the  fiber,  a  con- 
stituent having  a  high  percentage  of  cost,  must  be  re- 
corded as  it  passes  along  in  the  variable  costs  in  which  it 
is  the  responsible  factor. 

Ledger  Control  of  Costs.— Final  costs  are  not  difficult 
to  accumulate,  as  the  preceding  discussion  will  illustrate, 
but  their  control  in  the  general  books  is  somewhat  more 
complicated.  The  ledger  control  of  cost  of  production 
is  maintained  through  process  accounts,  which  may  be 


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1 

1 

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g  -             '.,.:.,;,;,,     -    "  -■  '^-=======-=^=== 

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Jl^                                          I  ._ 

fH 


260 


FINAL  COSTING  261 

devised  in  various  ways  according  to  conditions  in  tlie 
particular  case  and  which  might  be  summarized  as  fol- 
lows: 

1.  Process  account  for  process  goods  only  with  separate 
finished  goods  account. 

2.  Process  account  on  parts,  finished  part  account  and 
process  assembly  account. 

3.  Process  accounts  by  departments. 

4.  Process  accounts  by  specification  numbers,  classifica- 
tions, or  order  numbers. 

In  the  first  the  process  account  is  charged  with  all 
labor,  expense,  and  material  used  in  the  month.  It  is 
credited  with  the  cost  of  the  goods  made  in  the  month, 
which  in  turn  is  charged  into  the  finished  goods  account. 
The  control  is  furnished  by  the  division  into  process  and 
finished  goods  accounts.  This  method  is  generally  satis- 
factory and  of  frequent  usage. 

The  journal  entries  for  this  arrangement  would  be 

Dr.  Finished  Goods 

Cr.  Process  account 

with  cost  of  goods  made  in  the  month. 

Dr.  Cost  of  Sales 

Cr.  Finished  Goods 

with  cost  of  goods  shipped  in  the  month. 

If  the  process  account  is  large  and  a  further  division 
is  desired  of  the  process  inventory,  it  is  frequently  di- 
vided into  process  for  the  making  of  parts,  finished  parts 
for  the  parts  in  stock  waiting  assembly,  then  assembly 
process  for  the  assembly  operations.  The  journal  entries 
covering  these  accounts  would  be : 

Dr.  Finished  Part  account 

Cr.  Process  Part  Preparation  account 

with  cost  of  parts  finished  in  month ; 

Dr.  Assembly  Process  account 

Cr.  Finished  Part  account 


262  ESSENTIALS  OF  INDUSTRIAL  COSTING 

with  cost  of  finished  parts  used  in  month; 

Dr.  Cost  of  Sales 

Cr.  Assembly  Process  account 

with  manufacturing  cost  of  completed  assemblies  sold 
in  month. 

Occasionally  it  is   desired  to   secure   control  of  the 
process  inventory  by  departments  and  in  such  a  case  the 
journal  entries  might  be  indicated  as  follows: 
Dr.  Department  B  Process  account 

Cr.  Department  A  Process  account 

with  cost  of  production  Department  A  going  to  Depart- 
ment B ; 

Dr.  Department  C  Process  account 

Cr.  Department  B  Process  account 

with  cost  of  production  of  Department  B  going  to  De- 
partment C,  etc. 

Process  accounts  maintained  by  classifications  or  speci- 
fications or  order  number  are  of  frequent  occurrence  and, 
if  properly  kept,  are  of  supreme  value  in  proving  the 
profits  shown  by  classification  or  specification  or  order 
number.  A  statement  of  profit  by  classifications  in  the 
line  or  by  particular  specification  numbers  is  a  splendid 
institution  for  operating  control,  but  it  must  be  right  or 
it  possesses  possibilities  of  greater  harm  than  good.  The 
best  proof  is  to  regard  each  classification  or  specification 
as  if  it  were  produced  independently,  which  is  done  by 
distributing  the  labor  and  expense  and  material  used 
according  to  the  process  account  classification.  What- 
ever division  of  process  or  finished  goods  accounts  are 
made,  the  essential  motive  in  the  matter  is  to  provide 
control  for  costs  and,  in  case  of  evident  mistake,  to  cir- 
cumscribe the  error  within  narrower  limits  and  so  facili- 
tate its  location  and  correction. 

The  current  operation  of  ledger  accounts  to  show  cur- 


FINAL  COSTING  263 

rent  results  and  to  prove  them  is  the  basis  of  modern 
management  and  the  essence  of  costing.  The  closing  out 
of  the  various  accounts  through  other  intermediate  ac- 
counts, the  successive  closings  finally  reducing  to  profit 
and  loss  done  monthly,  instead  of  being  maintained  as  an 
annual  institution,  compose  one  of  the  finest  achievements 
in  accounting  procedure.  The  technique  of  this  operation 
in  the  ledger  is  shown  in  the  Chart  of  Accounts  in  Chapter 
XI,  Figure  80,  and  its  mechanical  simplicity,  when  once 
comprehended,  makes  it  surprising  that  its  practice  has 
been  so  long  in  maturing. 

Setting  of  Selling  Price.— In  concluding  the  discussion 
on  final  costs  it  is  pertinent  to  outline  the  method  of  com- 
puting selling-price  once  the  selling  cost  is  known.  The 
usual  difficulty  here  is  that  rate  of  profit  is  measured  on 
gross  sales  and  not  on  costs  and  the  method  of  estab- 
lishing the  selling  price  based  on  the  cost  has  not  always 
been  apparent  despite  its  simplicity.  The  method  pos- 
sibly can  best  be  presented  by  example  and  for  this  pur- 
pose assume  it  is  desired  to  fix  the  selling  price  on  an 
article,  the  selling  cost  of  which  is  $17.00  and  it  is  further 
desired  to  make  a  15  per  cent  profit  on  the  selling  price. 
The  selling  price  would  be  arrived  at  very  simply,  as  fol- 
lows: 

$17.00 

• ■  =    $20.00 

100  per  cent  — 15  per  cent 

Or  to  express  it  as  a  working  rule,  divide  the  selling 
cost  by  100  per  cent  less  the  per  cent  of  profit  to  be  at- 
tained on  the  selling  price. 

Final  costs  are  the  last  preliminary  step  to  the  con- 
struction of  statements  of  operation  and  condition  which 
are  to  be  discussed  in  the  next  and  concluding  chapter. 


CHAPTER  XI 

THE  CONXECTION"  OF  COSTING  WITH  THE  GEXER.\L  BOOKS  AND  THE 
PREPAR-^TION   OF   MONTHLY   STATEMENTS  THEREFROM 

Eveiy  manufacturer,  therefore,  is  vitally  concerned  with  the  two 
items — cost  and  profit. — McCullough. 

Acid  Test  of  Business. — The  statement  of  profit  or 
operation  is  the  acid  test  of  business  and  the  statement  of 
condition  the  barometer,  and  the  intelligence  they  both 
convey  should  establish  the  relative  success  of  commercial 
acti^'ity. 

The  final  purpose  of  costing  is  to  derive  profit  and  has, 
as  its  underlying  motive,  the  enhancing  of  profit  and  the 
promotion  of  industrial  stability.  The  long  technique  of 
costing  which  the  previous  pages  have  expounded  takes 
its  flower  in  the  preparation  of  current  statements  of 
operation  and  condition  proved  and  controlled  by  the  gen- 
eral books.  To  explain  the  detail  of  this  connection  of 
costs  with  the  general  books  and  the  preparation  of  state- 
ments therefrom  it  has  been  considered  best  to  present 
the  full  details  of  a  specific  case.  For  this  purpose  and 
as  a  starting  point  the  Trial  Balance  (Figure  72)  as  of 
January  1,  1920,  of  a  representative  corporation  will  be 
taken.  The  Ledger  Balances  from  which  this  Trial  Bal- 
ance was  taken  are  shown  in  Figure  73.  The  business 
transactions  which  have  occurred  in  January  are  the  sale 
of  $254,872.87  worth  of  goods  and  the  purpose  is  to  show 
what  profit  transpired  from  these  sales  and  in  what  man- 
ner the  month's  activity  effected  the  net  worth  of  the 
business. 

264 


CONNECTION  WITH  GENERAL  BOOKS  265 

Figure  72. — Trial  Balance  as  op  January  1,  1920 


Abnormal  Business 

Accounts  Receivable 

Accounts  Payable 

Brass 

Building    

Capital  Stock 

Cash  

Cost  of  Sales 

Covering  Material 

Discounts  Given 

Discounts  Taken  

Electrical  Equipment 

Factory  and  Office  Furniture 

Finished  Goods  

Fire  Insurance 

Goods  in  Process 

Land    

Liability  Insurance    

Life  Insurance  

Machinery  and  Tools   

Manufacturing  Expense 

Miscellaneous  Material 

Nickel  Silver  

Packing  Material 

Payroll    

Permanent  Fixtures  

Pipes  and  Fittings 

Profit  and  Loss    

Purchased  Parts  

Reserve  for  Depreciation    

Reserve  for  Grindstone  Replacement 

Sales   

Selling  Expense 

Steam  Power 

Steel    

Stores    

Surplus  

Water  Power    


$410,783.27 

12,367.14 
222,342.72 

209,274.56 

27,047.83 


45,748.13 

18,787.26 

126,322.94 

475,840.91 
42,782.50 


568,722.67 

12,848.96 

14,746.82 

8,533.46 

25,748.92 
12,458.14 

7,284.19 


42,128.33 
47,846.72 
27,123.75 

25,000.00 


Total   $2,383,739.22 


$175,346.18 
1,200,000.00 


152,907.14 
3,746.18 


851,739.72 


$2,383,739.22 


266 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  73. — Ledger  Balances 
(Italics  indicate  red  ink) 

ABNORMAL  BUSINESS 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATS 

Jan.  31 

Balance 

1,178.60 

1,178.60 

J. 

Balance 

1920 
Jan.  31 

1,178.60 

1,178.60 

1,178.60 

Jan.  31 

ACCOUNTS  PAYABLE 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.  31 
Jan.  31 

Balance 

C.  B. 

185,2.57.58 
186,.=iS7.97 

175,346.18 
196,449.37 

V.  R. 

Balance 
Balance 

1920 
Jan.  1 
Jan.  31 

371,795.55 

371,795.55 

186,537.97 

Jan.  31 

ACCOUNTS  RECEIVABLE 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.   1 
Jan.  31 

Balance 
Balance 

S.  L. 

410,783.27 
254,872.87 

212,407.^^1 
i53,2i8.33 

C.  B. 

Balance 

1920 
Jan.  31 
Jan.  31 

665.656.14 

665,656.14 

Jan.  31 

453,248.33 

BRASS 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.   1 
Jan.  31 

Balance 
Balance 

V.  R. 

12,367.14 
2,764.17 

3,762.86 
ll,368.i5 

J. 

Balance 

1920 
Jan.  31 
Jan.  31 

15,131.31 

15,131.31 

Jan.  31 

11,368.45 

CONNECTION  WITH  GENERAL  BOOKS 

FiGUEE  73, — Ledgee  Balances  (Continiied) 
BUILDING 


267 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.   1 

Balance 
Balance 

222,342.72 

222,342.72 

Balance 

Jan.  31 

222,342.72 

222,342.72 

Jan.  31 

222,342.72 

DISCOUNTS  TAKEN 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

Jan.  31 

J. 

2.796.41 

2,796.41 

C.  B. 

1920 
Jan.  31 

2,796.41 

2,796.41 

ELECTRICAL  EQUIPMENT 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.  1 

Balance 
Balance 

V.  R. 

45,748.13 
230.00 

i5,978.13 

Balance 

Jan.  31 

45,978.13 

45,978.13 

Jan.  31 

45,978.13 

FACTORY  AND  OFFLCE  FURNITURE 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 

Jan.   1 

Balance 
Balance 

18,787.26 

J8,787.26 

Balance 

Jan.  31 

18,787.26 

18,787.26 

Jan.  31 

18,787.26 

FINISHED  GOODS 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

POL. 

ITEMS 

DATE 

1920 
Jan.   1 
Jan.  31 

Balance 
Balance 

J. 

126,322.94 
201,426.18 

189,642.16 
138,106.96 

J. 

Balance 

1920 
Jan.  31 
Jan.  31 

327.749.12 

327,749.12 

Jan.  31 

138,106.96 

268 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


FiGUEE  73. — Ledger  Balances  (Continued) 
FIRE  IXSUBANCE 


DATB 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.  31 

Balance 

V.  R. 

360.55 

240.23 
120.32 

J. 

Balance 

1920 
Jan.  1 
Jan.  31 

360.55 

360.55 

Jan.  31 

120.32 

CAPITAL  STOCK 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

Jan.  31 

Balance 

1,200,000.00 

1,200,000.00 

Balance 
Balance 

1920 
Jan.   1 

1,200,000.00  1 

1,200,000.00 

1,200,000.00 

Jan.   31 

CASH 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.   1 
Jan.  31 

Balance 
Balance 

C.  B. 

209,274.56 
207,646.39 

182,461.17 
23i,i59.78 

C.  B. 
J. 

Balance 

1920 
Jan.  31 
Jan.  31 

416,920.95 

416,920.95 

Jan.  31 

234,459.78 

COST  OF  SALES 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATB 

1920 
Jan.  1 
Jan.   31 

J. 
J. 

189,642.16 
41,913.84 

231,556.00 

J. 

1920 

Jan.  31 

231,556.00 

231,556.00 

COVERING  MA.TERIAL 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.   1 
Jan.  31 

Balance 
Balance 

T.  R. 

27,047.83 
3,976.38 

6,872.71 
ik,151.50 

J. 

Balance 

1920 
Jan.  31 
Jan.  31 

31,024.21 

\       31.024.21 

Jan.  31 

24,151.50 

CONNECTION  WITH  GENERAL  BOOKS 

Figure  73. — Ledger  Balances  (Continued) 
DISCOUNTS  GIVEN 


269 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 

Jan.  31 

C.  B. 

4,761.42 

4,761.42 

J. 

Jan.  31 

4,761.42 

4,761.42 

GOODS  IN  PROCESS 


LAND 


LIABILITY  INSURANCE 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 

Jan.   1 
Jan.  31 
Jan.  31 
Jan.  31 

Balance 
Balance 

J. 
J. 
J. 

475,840.91 
32,974.21 
89,590.21 
53,390.83 

201,426.18 
i30,369.98 

J. 

Balance 

1920 
Jan.  31 

Jan.  31 

Jan.   31 

651,796.16 

651,796.16 

Jan.  31 

450,369.98 

DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.   1 

Balance 
Balance 

42,782.50 

42,782.50 

Balance 

Jan.  31 

42,782.50 

42,782.50 

Jan.   31 

42,782.50 

DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

Jan.  SI 

Balance 

1,115.66 

1,115.66 

J. 

Balance 

1920 
Jan.  31 

1,115.66 

1,115.66 

1,115.66 

Jan.  31 

LIFE  INSURANCE 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

Jan.  SI 

Balance 

260.iS 

260.43 

J. 

Balance 

1920 
Jan.  31 

260.43 

260.43 

260.43 

Jan.  31 

270  ESSENTIALS  OF  INDUSTRIAL  COSTING 

FiGDEE  73. — ^Ledger  Balances  (Continued) 
MACHINER"i  AND  TOOLS 


DATH 

ITEMS 

FOI.. 

DEBITS 

CREDITS 

FOL. 

ITKHB 

DATS 

1920 
Jan.   1 

Balance 
Balance 

V.  R. 

568,722.67 
3,750.60 

1 

j     572^73.27 

Balance 

Jan.  31 

572,473.27 

572,473.27 

Jan.  31 

572,473.27 

1 

MANUFACTURING  EXPENSE 


DATB 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATK 

1920 
(Jan.  31 
Jan.  31 
Jan.  31 
Jan.  31 

V.  R. 

J. 
J. 
J. 

1,058.85 

4,791.90 

39,823.92 

9,380.89 

2,843.33 
52,212.23 

J. 
J. 

1920 

Jan.  31 
Jan.  31 

Jan.  31 

55,055.56 

55,055.56 

1 

MISCELLANEOUS  MATERIAL 


DATH 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.   1 
Jan.  31 

Balance 
Balance 

V.  R. 

12,848.96 
2,768.14 

2,741.84 
12,875.26 

J. 

Balance 

1920 
Jan.  31 
Jan.  31 

15,617.10 

15,617.10 

Jan.  31 

12,875.26 

NICKEL  SILVER 


DATB 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.   1 
Jan.  31 

Balance 
Balance 

V.  R. 

14,746.82 
968.46 

3,971.62 
ll,7i3.66 

J. 

Balance 

1920 
Jan.  31 
Jan.  31 

15,715.28 

15,715.28 

Jan.  31 

11,743.66 

PACKING  MATERIAL 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATB 

1920 
Jan.  1 
Jan.  31 

Balance 
Balance 

V.  R. 

8,533.46 
1,276.76 

2,134.70 
7,675.52 

J. 

Balance 

1920 
Jan.  31 
Jan.  31 

9,810.22 

9,810.22 

Jan.  31 

7,675.52 

CONNECTION  WITH  GENERAL  BOOKS 


271 


Figure  73. — Ledger  Balances  (Continued) 
PAYEOLL 


DATS 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.  31 

V.  R. 

158,060.32 

158,060.32 

J. 

1920 

Jan.  31 

158,060.32 

158,060.32 

PEKMANENT  FIXTURES 


DATB 

ITEMS 

FOL. 

DEBITS 

1920 

Jan.  1 

Balance 
Balance 

V.R. 

25,748.92 
550.45 

26,299.37 

Jan.  31 

26,299.37 

CREDITS 

FOL. 

ITEMS 

DATE 

26,299.37 

Balance 

1920 
Jan.  SI 

26,299.37 

PIPES  AND  FITTINGS 


DATH 

ITEMS 

FOL. 

DEBITS 

1920 

Jan.  1 

Balance 
Balance 

12,458.14 

12,458.14 

Jan.  31 

12,458.14 

CREDITS 

FOL. 

ITEMS 

DATE 

12A58.U 

Balance 

Jan.  SI 

12,458.14 

PEODUCTIVE  LABOR 


DATS 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.  31 

J. 

89,590.21 

89,590.21 

J. 

1920 

Jan.  31 

89,590.21 

89,590.21 

PROFIT  AND  LOSS 


DATB 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.  31 

Jan.   31 
Jan.  31 

J. 
J. 
J. 

231,550.00 

21,351.86 

4,761.42 

254,872.87 
2,796.41 

J. 
J. 

1920 

Jan.  31 
Jan.  31 

257,669.28 

257,669.28 

272 


ESSENTIALS  OF  INDUSTRIAL  COSTING 


Figure  73. — Ledger  Balances  (Continued) 
PURCHASED  PARTS 


DATH 

ITEMS 

FOL. 

DEBITS 

1920 
Jan.   1 
Jan.  31 

Balance 
Balance 

V.  R. 

7,284.19 
786.19 

8,070.38 

Jan.  31 

6,507.58 

CREDITS 

FOL. 

ITEMS 

DATE 

1,562.80 
0,507.58 

J. 

Balance 

1920 
Jan.  31 
Jan.  31 

8,070.38 

RESERVE  FOR  DEPRECIATION 


DATE 

ITEMS 

FOL. 

DEBITS 

CKKDITS 

FOL. 

ITEMS 

DATE 

1920 

Jan.  31 

Balance 

160,268.60 

152,907.14 
7,361.52 

J. 

Balance 
Balance 

1920 
Jan.   1 
Jan.  31 

160,268.66 

160,268.66 

160,268.66 

Jan.   31 

RESERVE  FOR  GRINDSTONE  REPLACEMENT 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.  31 

Balance 

■i,096.18 

3,746.18 
350.00 

J. 

Balance 
Balance 

1920 
Jan.  1 
Jan.  31 

4.096.18 

4,096.18 

4,096.18 

Jan.  31 

SALES 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.  31 

J. 

254,872.87 

254,872.87 

S.  L. 

1920 

Jan.  31 

254,872.87 

254,872.87 

SELLING  EXPENSE 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 

Jan.  31 
Jan.  31 
Jan.  31 
Jan.  31 

V.  R. 
J. 
J. 
J. 

10,361.14 

28,646.19 

63.18 

2,843.33 

41,913.84 

J. 

1920 

Jan.  31 

Jan.  31 

41,913.84 

41,913.84 

CONNECTION  WITH  GENERAL  BOOKS 

Figure  73. — Ledger  Balances  (Continued) 
STEAM  POWEE 


273 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

SATE 

1920 
Jan.  1 

Balance 
Balance 

42,128.33 

42,128.33 

Balance 

Jan.  31 

42,128.33 

42,128.33 

Jan.  31 

42,128.33 

STEEL 


DATE 

ITEMS 

FOL. 

DEBITS 

1920 

Jan.   1 

Balance 
Balance 

V.  R. 

47,846.72 
5,746.18 

53,592.90 

Jan.  31 

41,665.22 

CREDITS 

FOL. 

ITEMS 

DATE 

11,927.68 
41,065.22 

J. 

Balance 

1920 
Jan.  31 
Jan.  31 

53,592.90 

STORES 


DATE 

ITEMS 

FOL. 

DEBITS 

CREIDITS 

FOL. 

ITEMS 

DATE 

1920 

Jan.  1 
Jan.  31 

Balance 
Balance 

V.  R. 

27,123.75 
3,791.18 

4,791.90 
26,123.03 

J. 

Balance 

1920 
Jan.  81 
Jan.  81 

30,914.93 

30,914.93 

Jan.  31 

26,123.03 

SURPLUS 


DATE 

ITEMS 

POL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

Jan.  SI 

Balance 

873,091.58 

851,739.72 
21,351.86 

J. 

Balance 
Balance 

1920 
Jan.  1 
Jan.  31 

873,091.58 

873,091.58 

873,091.58 

Jan.  31 

TAXES 


DATE 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

Jan.  31 

Balance 

40.73 

40.73 

J. 

Balance 

1920 
Jan.  31 

40.73 

40.73 

40.73 

Jan.  31 

.  274  ESSENTIALS  OF  INDUSTRIAL  COSTING 

Figure  73. — Ledger  Balances  {Continued) 
TIRE  RESERVE 


dTB 

ITEMS 

FOL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.  SI 

Balance 

75.50 

75.50 

J. 

Balance 

1920 
Jan.  31 

75.50 

75.50 

73.50 

Jan.  31 

WATER 

POWER 

DATE 

ITEMS 

POL. 

DEBITS 

CREDITS 

FOL. 

ITEMS 

DATE 

1920 
Jan.   1 

Balance 

25,000.00 

25,000.00 

Balance 

1920 
Jan.  SI 

25,000.00 

25,000.00 

Jan.   31 

Balance 

25,000.00 

Method  of  Compiling  Profit  Statement.— As  outlined  at 
length  in  previous  chapters,  the  profit  is  determined  by 
the  simple  process  of  deducting  from  the  sales  the  cost  of 
the  sales  so  that  the  first  point  of  attack  is  to  determine 
the  amount  which  represents  this  cost  of  sales.  This  cost 
is  obtained  by  an  itemization  of  the  sales  for  the  month 
by  pattern  numbers  with  the  quantities  of  each  pattern 
sold.  The  quantity  indicated  for  each  pattern  number 
is  then  multiplied  by  the  cost  of  that  number,  the  total 
of  all  patterns  obviously  being  the  presumed  cost  of  the 
sales.    A  tabulation  of  this  kind  is  shown  in  Figure  74. 

It  is  evident  that  unless  some  check  exists  whereby  the 
accuracy  of  this  cost  of  sales  could  be  assured,  the  appar- 
ent profit  would  not  be  a  dependable  or  useful  figure.  The 
proof,  however,  of  this  method  of  ascertaining  profit  is 
available  and  is  obtained  by  means  of  the  valuation  of 
the  process  and  finished  goods  inventories.  A  month's 
operation  in  such  a  business  involves  the  issue  of  raw 
material  to  process,  the  engagement  of  labor  thereon  with 
an  accompanying  burden  of  expense,  the  resultant  values 


CONNECTION  WITH  GENERAL  BOOKS 

Figure  74. — Cost  of  Sales  for  January,  1920 


275 


PATTERN  NO. 

QUANTITY 

SELLING  COST 

VALUE 

IN  DOZENS 

PER  DOZEN 

275 

250 

$18.69 

$4,672.50 

276 

365 

16.37 

5,975.05 

279 

294 

12.70 

3,733.80 

281 

293 

26.78 

7,846.54 

289 

148 

45.56 

6,742.88 

301 

157 

17.49 

2,745.93 

312 

72 

18.72 

1,347.84 

470 

203 

17.88 

3,629.64 

564 

228 

18.50 

4,218.00 

727 

252 

14.75 

3,717.00 

926 

367 

12.86 

4,719.62 

1012 

420 

13.50 

5,670.00 

1014 

391 

17.83 

6,971.53 

1046 

429 

18.59 

7,975.11 

1176 

432 

17.50 

7,560.00 

1180 

472 

18.58 

8,769.76 

1203 

422 

15.98 

6,743.56 

1210 

373 

13.74 

5,125.02 

1375 

188 

35.76 

6,722.88 

1396 

155 

37.87 

5,869.85 

1415 

294 

16.20 

4,762.80 

1610 

330 

17.39 

5,738.70 

1756 

445 

13.49 

6,003.05 

1810 

178 

8.92 

1,587.76 

1926 

67 

11.28 

755.76 

2213 

66 

18.21 

1,201.86 

2310 

294 

19.47 

5,724.18 

2315 

235 

18.60 

4,371,00 

2325 

375 

18.02 

6,757.50 

2330 

472 

14.29 

6,744.89 

2346 

304 

17.54 

5,332.16 

2357 

172 

28.99 

4,986.28 

2367 

100 

37.46 

3,746.00 

2372 

511 

17.55 

8,968.05 

:!386 

409 

18.94 

7,746.46 

2397 

335 

13.31 

4,459.20 

$189,642.16 

being  additions  to  the  amount  of  goods  in  process  as 
shown  by  the  balance  of  that  account  as  of  January  1.  It 
also  envisages  the  sale  of  the  finished  product  and  the 
withdrawal  of  value  from  the  finished  goods  account  in  the 
shipments  made  and  concurrently  through  purchase  addi- 


276  ESSENTIALS  OF  INDUSTRIAL  COSTING 

tions  to  raw  material  reserves,  with  the  necessary  obliga- 
tions therefor.  Also,  as  goods  are  completed  they  are 
transferred  from  the  Process  account  to  the  Finished 
Goods  account.  Therefore,  the  proof  of  the  accuracy 
wdth  which  the  profits  are  determined  from  the  cost  of 
sales  resides  in  the  value  of  the  balance  of  goods  repre- 
sented by  the  process  and  finished  goods  inventories. 

The  profit  statement,  or  statement  of  operation,  thus 
requires  the  cost  of  sales,  the  cost  of  goods  completed, 
the  cost  of  the  various  raw  materials  entering  process 
and  the  productive  labor  and  expense  which  are  applied 
to  convert  the  raw  materials.  This  information  is  ob- 
tained from 

Material  Requisition  Distribution Figure     8 

Labor  Distribution    Figure  10 

Cost  of  Sales    Figure  76 

Cost  of  Goods  Completed   Figure  77 

Expense  Analysis   Figure  63 

The  expense  rates  are  established  bj"  the  Expense 
Analysis,  and  the  illustration  in  Chapter  IX  of  such  an 
analysis  is  part  of  the  system  herein  presented.  The  Ex- 
pense Analysis,  as  was  described  in  that  chapter,  rested 
upon  the  several  sources  of  data. 

Supply  Requisition  Distribution Figure    9 

Voucher  Register  Distribution Figure  11 

Nonproductive  Labor  Distribution Figure  10 

Journal  Entries Figure  78 

An  Actual  Example.— "VYith  this  information  at  hand 
the  statement  of  operation  illustrated  in  Figure  78  was 
constructed.  This  statement  shows  the  sales,  the  cost  of 
sales,  and  the  profit ;  it  shows  the  value  of  materials  used, 
labor  and  expense  as  additions  to  process  inventory ;  and 
it  also  shows  the  cost  of  goods  completed  as  deductions 
from  the  process  inventory  and  addition  to  the  finished 
goods  inventory. 


CONNECTION  WITH  GENERAL  BOOKS  277 

Figure  75. — Cost  op  Goods  Finished  for  January,  1920 


PATTERN  NO. 

QUANTITY 

MANUFACTURING 

VALUE 

IN  DOZENS 

COST  PER  DOZEN 

187 

302 

$12.40 

$3,744.80 

197 

275 

17.46 

4,801.50 

225 

399 

14.70 

5,865.30 

246 

417 

16.70 

6,963.90 

275 

495 

16.06 

7,949.70 

294 

566 

15.43 

8,733.38 

305 

1079 

8.15 

8,793.85 

312 

360 

15.78 

5,680.80 

327 

554 

12.16 

6,736.64 

356 

395 

10.97 

4,333.15 

389 

447 

8.47 

3,786.09 

465 

501 

9.46 

4,739.46 

492 

562 

12.18 

6,845.16 

525 

463 

14.56 

6,741.28 

564 

499 

15.72 

7,844.28 

786 

813 

10.75 

8,739.75 

872 

577 

11.15 

6,433.55 

884 

472 

12.16 

5,739.52 

898 

318 

14.92 

4,744.56 

924 

262 

13.86 

3,631.32 

945 

567 

10.12 

5,738.04 

987 

309 

12.75 

3,939.75 

1004 

277 

14.96 

4,143.92 

1012 

346 

11.47 

3,968.62 

1018 

279 

15.67 

4,371.93 

1019 

601 

14.92 

8,966.92 

1079 

589 

13.87 

8,169.43 

1118 

692 

12.92 

8,940.64 

1186 

610 

14.67 

8,948.70 

1210 

897 

11.69 

10,485.93 

1254 

496 

17.96 

8,908.16 

1610 

155 

12.88 

1,996.15 

$201,426.18 

The  cost  of  sales  is  determined,  as  detailed  on  the  Cost 
of  Sales  Sheet,  Figure  75,  and  amounts  to  $189,642.16. 
The  value  of  the  material  used  in  the  month  is  obtained 
from  the  Material  Requisition  Distribution  (Figure  5) 
and  is  $32,974.21. 

The  productive  labor  expended  in  the  month  appears 
on  the  Payroll  Distribution  (Figure  7)  as  $89,590.21. 


278  ESSENTIALS  OF  INDUSTRIAL  COSTING 

Figure  76. — Ledger  Postings 


From  Voucher  Register: 

Dr. — Machine  and  Tools 

Electrical  Equipment   

Permanent  Fixtures 

Steel , 

Brass 

Nickel  Silver 

Covering  Material  

Purchased  Parts 

Packing  Material  

Miscellaneous  Material  

Stores    

Payroll 

Manufacturing  Expense 

Selling  Expense 

Fire  Insurance  

Cr. — Accounts  Payable 

From  Cash  Book: 

Dr.— Cash , 

Discounts  Given  

Cr. — Accounts  Receivable 

Dr. — Accounts  Payable 

Discounts  Taken , 

Cr.— Cash 

From  Sales  Ledger: 

Dr. — Accounts  Receivable 

Cr.— Sales  

From    Material    Requisitions    Distribu 
tion : 

Dr. — Goods  in  Process   

Cr. — Brass    

Nickel   Silver   , 

Steel  , 

Covering  Material 

Purchased  Parts 

Packing  Material 

Miscellaneous  Material  . , 

From  Supply  Requisition  Distribution 

Dr. — Manufacturing  Expense 

Cr. — Stores  , 


DR. 


I    3,750.60 

230.00 

550.45 

5,746.18 

2,764.17 

968.46 

3,976.38 

786.19 

1,276.76 

2,768.14 

3,791.18 

158,060.32 

1,058.85 

10,361.14 

360.55 


207,646.39 
4,761.42 


185,257.58 


254,872.87 


32,974.21 


CR. 


4,791.90 


$196,449.37 


212,407.81 


2,796.41 
182,461.17 


254,872.87 
3,762.86 


3,762.86 
3,971.62 
11,927.68 
6,872.71 
1,562.80 
2,134.70 
2.741.84 


4,791.90 


CONNECTION  WITH  GENERAL  BOOKS 

Figure  76. — Ledger  Postings  (Continued) 


279 


From  Payroll  Distribution: 

Dr. — Selling  Expense 

Manufacturins:  Expense 

Productive  Labor 

Cr. — Payroll   

Dr. — Manufacturing  Expense 

Selling  Expense   

Cr. — Reserve  for  Depreciation. 

Taxes   

Fire  Insurance  

Liability  Insurance 

Group  Life  Insurance  . . . 
Reserve    for    Grindstone 

Replacement 

Tire  Reserve 

Dr. — Selling  Expense 

Cr. — Manufacturing  Expense 

Dr. — Goods  in  Process 

Cr. — Productive  Labor 

Dr. — Goods  in  Process 

Cr. — Manufacturing  Expense 
Abnormal  Business  .... 

Closing  Journal  Entries: 

Dr. — Finished  Goods  

Cr. — Goods  in  Process    . . . . , 
With  cost  of  goods  finished. 

Dr. — Cost  of  Sales 

Cr. — Finished  Goods    

With  cost  of  goods  sold. 

Dr. — Cost  of  Sales 

Cr. — Selling  Expense 

Dr. — Profit  and  Loss 

Cr. — Cost  of  Sales 

Dr.— Sales 

Cr. — Profit  and  Loss 

Dr. — Profit  and  Loss 

Cr. — Discounts  Given 

Dr. — Discounts  Taken   

Cr. — Profit  and  Loss , 

Dr. — Profit  and  Loss  

Cr. — Surplus    


DR. 


$28,646.19 
39,823.92 
89,590.21 

9,380.89 
63.18 


2,843.33 
89.590.21 
53,390.83 

201,426.18 

189,642.16 

41,913.84 

231,556.00 

254,872.87 

4,761.42 

2,796.41 

21,351.86 


CR. 


$158,060.32 

7,361.52 
40.73 

240.23 
1,115.66 

260.43 

350.00 
75.50 

2,843.33 

89,590.21 

52,212.23 
1,178.60 


201,426.18 
189,642.16 

41,913.84 
231,556.00 

254,872.87 

4,761.42 

2,796.41 

21,351.86 


280  ESSENTIALS  OF  INDUSTRIAL  COSTING 

FiGURB  77. — Trial  BAiiANCE  as  of  January  31,  1920 


1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

29 

30 

31 

32 


Abnormal  Business 

Accounts  Payable  

Accounts  Receivable 

Building   

Brass  

Capital  Stock 

Cash 

Covering  Material 

Electrical  Equipment 

Factors'  and  Office  Furniture  . . . 

Finished  Goods 

Fire  Insurance 

Goods  in  Process 

Land 

Liability  Insurance 

Life  Insurance 

Machinery  and  Tools  

Miscellaneous  Material 

Nickel  Silver 

Permanent  Fixtures  

Pipes  and  Fittings  

Packing  Material 

Purchased  Parts   

Resen'e  for  Depreciation   

Reserve  for  Grindstone  Replacement 

Steam  Power  

Steel  

Stores  

Surplus 

Taxes 

Tire  Reserve 

Water  Power 


DR. 


$453,248.33 

222,342.72 

11,368.45 

234,459.78 
24,151.50 
45,978.13 
18,787.26 

138,106.96 
120.32 

450,369.98 
42,782.50 


572,473.27 
12,875.26 
11,743.66 
26,299.37 
12,458.14 
7,675.52 
6,507.58 


42,128.33 
41,665.22 
26,123.03 


25,000.00 


$2,426,665.31 


CR. 


$1,178.60 
186,537.97 


1,200,000.00 


1,115.66 
260.43 


160,268.66 
4,096.18 


873,091.58 
40.73 
75.50 


$2,426,665.31 


The  total  manufacturing  expense  developed  in  the 
month  is  $52,212.23,  which  may  be  checked  from  the  Ex- 
pense Analysis  (Figure  62)  and  the  Proof  Sheet  (Figure 
63).  This  amount  is  less  by  $1,178.60  than  the  normal  ex- 
pense (see  Figure  64)  used  in  computing  the  costs,  on 
which  the  cost  of  sales  is  based,  so  that  the  total  charge 
into  goods  in  process  is  $52,212.23,  plus  $1,178.60,  or  $53,- 
390.83,  as  the  journal  entries  in  Figure  78  portray. 


CONNECTION  WITH  GENERAL  BOOKS    281 

Figure  78. — Statement  of  Operation  as  of  January  31,  1920 
GROSS  SALES  $254,872.87 

cost  OF  SALES : 

Materials  used  in  month: 

Brass    $3,762.86 

Nickel  Silver  3,971.62 

Steel    11,927.68 

Covering  Material 6,872.71 

Purchased  Parts  1,562.80 

Packing  Material   2,134.70 

Miscellaneous  Material   2,741.84 

Total  materials  used $32,974.21 

Productive  labor 89,590.21 

Normal  manufacturing  expense 53,390.83 

Total  additions  to  inventory  $175,955.25 

Inventory  Process  Goods  as  of  Jan.  1 . . .       475,840.91 

Inventory  Process  Goods  as  of  Jan.  1, 

plus  additions  $651,796.16 

Cost  of  goods  finished 201,426.18 

Inventorv  Process  Goods  as  of  Feb.  1 . . .  $450,369.98 
Inventory  Finished  Goods  as  of  Jan.  1. .  $126,322.94 
Cost  of  Goods  Finished  201,426.18 

Inventory    Finished    Goods    plus    addi- 
tions         $327,749.12 

COST  OF  SALES 189,642.16    $189,642.16 

Inventory  Finished  Goods  as  of  Feb.  1 $138,106.96 

MANUFACTURING  PROFIT $65,230.71 

Selling  expense 41,913.84 

SELLING   PROFIT    $23,316.87 

Discounts  Taken 2,796.41 

PROFIT   PLUS   ADDITIONS    $26,113.28 

Discounts  Given  4,761.42 

NET  PROFIT,  ACTUAL    $21,351.86 

Abnormal  expense  1 178.60 

NET   PROFIT,    NORMAL    $22,530.46 


282  ESSENTIALS  OF  INDUSTRIAL  COSTING 

Figure  79. — Statement  of 

Plant  and  Equipment  : 

Buildings    $222,342.72 

Electrical  equipment 45,978.13 

Factory  and  office  furni- 
ture     18,787.26 

Land   42,782.50 

Machineiy  and  tools  ....  572,473.27 

Pemanent  fixtures 26,299.37 

Pipes  and  fittings 12,458.14 

Steam  power 42,128.33 

Water  power 25,000.00 

Total  plant  and  equipment  $1,008,249.72 

Less  depreciation   160,268.66 

Depreciated  plant  and  equipment $847,981.06 

Current  Assets: 
Liventory 

Brass    $11,368.45 

Covering  material   24,151.50 

Miscellaneous  material   12,875.26 

Nickel  silver 11,743.66 

Packing  material 7,675.52 

Purchased  parts 6,507.58 

Steel 41,665.22 

Stores 26,123.03 

Goods  in  process 450,369.98 

Finished  goods 138,106.96 

Total  inventory   $730,587.16 

Accounts  receivable 453,248.33 

Cash 234,459.78 

Prepaid  operating  expense 

Fire  insurance  120.32 


TOTAL  ASSETS $2,266,396.65 

The  data  specijfied  in  the  foregoing  supply  the  basis  for 
constructing  the  statement  of  operation  (Figure  78). 
Keference  to  this  will  show  that  the  materials  used  are 
itemized  by  the  accounts  from  which  they  come,  the  pro- 
ductive labor  and  the  normal  expense  added  to  them,  the 
total  increasing  the  process  inventory  by  $175,955.25, 
resulting  in  a  total  value  in  Goods  in  Process  of 
$651,796.16.     From  this  is  deducted  the  goods  finished 


CONNECTION  WITH  GENERAL  BOOKS  283 

Condition  as  op  Januaey  31,  1920 

Capital  Stock $1,200,000.00 

Current  Liabilities  : 

Accounts  payable    $186,537,97 

Abnormal  business  1,178.60 

Accrued  Expense: 

Tire  reserve 75.50 

Reserve  for  wheel  replacement 4,096.18 

Liability  insurance   1,115.66 

Group  life  insurance 260.43 

Taxes   40.73 


Surplus,  January  1  $851,739.72 

Profit,  January   , 21,351.86 


193,305.07 
873,091.58 


TOTAL  CAPITAL,  LIABILITIES  AND  SURPLUS.  $2,266,396.65 

in  the  month,  as  shown  in  Figure  75.  This  tabulation 
shows  the  manufacturing  cost  of  the  patterns  finished  and 
totals  for  the  month,  $201,426,18,  which  amount,  when  de- 
ducted from  the  above  figure,  leaves  a  balance  in  goods  in 
process  of  $450,369.98.  This  balance  may  be  verified 
on  the  Ledger,  Figure  73,  the  Trial  Balance,  Figure  77, 
and  the  Statement  of  Condition,  Figure  79. 
To  the  inventory  of  finished  goods  as  of  January  1st, 


284  ESSENTIALS  OF  INDUSTRIAL  COSTING 

namely,  $126,322.04,  the  cost  of  the  goods  finished  in  Jan- 
uary is  added,  giving  a  total  of  $327,749.12,  which  is  re- 
duced by  the  cost  of  the  goods  shipped  in  the  mouth,  or 
$189,642.16,  leaving  a  balance  of  $138,106.96,  which  may 
be  checked  in  the  same  manner  as  the  Goods  in  Process. 

This  figure,  $189,642.16,  is  the  cost  of  sales  which,  when 
subtracted  from  the  sales,  leaves  the  manufacturing 
profit  of  $65,230.71. 

The  selling  expense  is  accumulated  in  the  Expense 
Analysis,  Figure  62,  and  the  control  account  in  the  Led- 
ger, Figure  73.  The  total  selling  expense  thus  collected  is 
$41,913.84  and  is  charged  against  the  sales  for  the  month, 
leaving  a  selling  profit  of  $23,316.87.  To  this  profit  is 
added  the  discounts  taken,  of  $2,796.41  on  invoices  paid  in 
the  month  and  from  this  total  is  deducted  the  discounts 
given  of  $4,761.42  on  outstanding  bills  paid  for  in  the 
mouth,  lea\ing  a  net  actual  profit  of  $21,351.86.  The  ab- 
normal business  account  balance,  since  it  is  on  the  credit 
side,  is  added  to  this  profit  to  indicate  the  net  normal 
profit  of  $22,530.46.  This  result  is  the  goal  of  costing  and 
accounting  effort,  as  well  as  the  return  for  the  transac- 
tions which  are  represented  thereby.  The  figures  de- 
scribed are  verified  by  the  Ledger  accounts,  and  the  con- 
trol through  the  general  books  is  obtained  by  the  series  of 
Journal  entries  (Figure  76),  which,  if  carefully  followed 
through,  will  be  seen  to  comprise  a  kind  of  accounting 
narrative  of  the  transactions  of  the  month  with  the  re- 
sults expressed  in  profit. 

The  Journal  entries,  when  posted,  likewise  control  the 
Expense  Analysis  shown  in  Figure  62,  the  operation  of 
which  was  exhaustively  described  in  Chapter  IX. 

After  the  posting  of  these  Journal  entries  in  the  Ledger 
(Figure  73)  a  Trial  Balance,  Figure  77,  is  drawn  off. 
From  this  Trial  Balance  the  Statement  of  Condition 


?E   80 
ACCOUNTS 
JOURNAL  ENTRIES 


CONNECTION  WITH  GENERAL  BOOKS  285 

(Figure  79)  may  be  drawn  up  and  it  will  be  observed  that 
the  accounts  remaining  on  this  Trial  Balance,  and  hence 
which  appear  on  the  statement  of  condition,  are  only 
those  which  remain  after  all  others  have  been  closed  out 
through  profit  and  loss.  The  principle  on  which  the 
Statement  of  Condition  is  erected  was  described  and  illus- 
trated in  Chapter  11. 

The  closing  out  of  the  various  accounts  and  the  con- 
nection which  is  made  between  the  costs,  the  Expense 
Analysis  and  the  various  subsidiary  distributions  and  the 
general  books  is  the  vital  aspect  of  modern  accounting 
and  is  the  abiding  aim  of  this  volume. 

In  order  to  clarify  the  words  and  the  figures  a  graphic 
presentation  of  the  closing  of  the  accounts  and  of  the 
nature  of  the  entries  is  made  in  a  Chart  of  Accounts, 
shown  in  Figure  80.  This  chart  may  give  a  readier  grasp 
of  the  details  and  enable  better  comprehension  of  the  pro- 
cedure, and  it  is  added  with  that  end  in  mind.  It  may  be 
observed  that  the  illustrations  throughout  the  book  con- 
tain data  that  contribute  to  the  final  statements  just  de- 
scribed and  with  them  compose  a  complete  and  specific 
case  or  example  illustrating  the  principles  developed  in 
the  text.  This  arrangement  has  been  made  with  the  pur- 
pose of  presenting  clearly  and  practically  the  basis  of 
modern  industrial  costing,  its  control  by  the  ledger,  and 
its  final  flower  in  statements  of  profits  and  of  net  worth, 
or  condition. 


INDEX 


Abnormal    and    normal    expense, 

245-247 
Abnormal  Business  account,  245, 
246 
a  basis  for  commercial  operat- 
ing control,  4 
Accounting      and      cost      system, 
standardized    for    electrical 
manufacturing  (table),  173 
development  from  rudiments  to 

complex  process,  48 
evolution  of,  3 

narrative,   furnished    by    jour- 
nal entries,  284 
registers     commercial     activity, 

4,  6 
most  vital  aspect  of,  285 
Accounts,  chart  of,  showing  entries 
and  closing  of  accounts,  fac- 
ing 284 
controlling,    50 
payable,  50 
process,    in    ledger    control    of 

costs,  200,  261,  262,  263 
receivable,  50 
reserve,  49 
Accuracy,  in  costing,  an  indispen- 
sable economic  function,  20 
Acknowledgment  slip,  84,  85 
Actual  and  normal  expenses,  and 
the  journal,  246 
in  addition  to  ledger,  245,  246 
Administrative  and  oflSee  salaries, 

charging  off,  143 
Administrative     expense,     appor- 
tion able  to  selling  or  manu- 
facturing, 51 
in  costs,  205-211 
Agencies  in  depreciation,  169,  170 
Allocation  of  cost  to  product,  the 
main  principle  of  costing, 
53 


Analysis,   expense,    controlled   by 
journal  entries,  284 
discussion    of,    with    specimen 

sheets,  151-167 
method  of  closing,  242-244 
proof  of  closing,  241,  242 
typical    complete,     for     cutlery 
manufacturer      (tables), 
219-239 
typical  illustration  of,  214-216 
Annual   statements,   and  account- 
ing procedure,  6 
Appreciation,  what  it  is,  and  how 
to     handle     it     in     costs, 
179 
Assembly  industry,  final  costs  in, 

248 
Attendance    and     service    bonus, 
139,    140,    143 


Balance,  trial  (table),  280 

Balance,   trial,   and   statement   of 
condition,  284,  285 
reproduction  of,  265 

Balances,  ledger,  reproduction  of, 
266-274 

Balance  Sheet,  as  showing  condi- 
tion of  an  enterprise,  6 
based    on   operating   statement, 

22 
how  it  differs  from  profit   and 

loss  statement,  32 
statement     of     condition,     cost 
data,  32,  33 

Base   hourly   rate,    of   great   im- 
portance, 113 

Bin  tag,  a  condensed  stock  record, 
96 

Blanket   overhead,   53 

Bonds,  and  the  burden  of  interest, 
180,  181 


287 


288 


INDEX 


Bonus  percentage  tables,  stand- 
ard, 138 

Bonuses  in  relation  to  clock  cards, 
113 

British  Ministry  of  Reconstruc- 
tion and  its  figures  on  cost- 
ing, 15 

Budget  fixed  on  basis  of  costs,  38 

Budgetary    control   and   costs,   22 

Business  account,  Abnormal,  245, 
246 

Business  strategy  aided  by  cost 
data,  34 

Business,  the  acid  test  of,  state- 
ment   of   profit    or   opera- 
tion, 264 
the  barometer  of,  statement  of 
condition,   264 

By-product,  when,  sci'ap  becomes, 
99 


Capacity,  average  percentage  of, 
employed   in    New    Jersey 
industries    (table),   27 
normally   largely   exceeds   sales 
demands,  26 

Capital  and  turnover,  23 

Capital  increase,  65-year  period, 
per  establishment,  per  em- 
ployee, 5 

Capital,  industrial,  table  showing 
development  of,  1850-1915, 
5 
should  bring  maximum  return, 

21 
surplus,  and  sales,  182 
and  similar  items,  218 

Charges,  fixed,  calculation  of, 
167,  168 

Charging  expense  to   costing,   41 

Chart  of  accounts,  facing,  284 

Chesterfield,  Lord,  on  pei'spec- 
tive  in  costing,  59 

Clerical  expense  of  cost  system 
not  heavy,  40 

Clock  numbers  to  locate  em- 
ployees in  departments, 
115 

Coal  as  a  fuel  in  industry,  186, 
188,  189 


Collection  of  expense,  150,  151 

Combination  of  the  two  costing 
methods   possible,  46 

Commerce,  costing  as  the  crux  of, 
19 

Company  Act  of  Parliament, 
1845,  provides  for  auditing 
certain   companies,   3 

Compensation,  or  employees'  lia- 
bility, insurance,   167 

Competition,    ignorant,    furthered 
costing,  10 
in  relation  to  prices,  25 
intelligently   controlled  by  cost 

data,  34,  35 
unintelligent,    avoided    through 
cost  system,  22 

Compiling  statement  of  profit, 
274,    275,    276 

Condition  and  operation  state- 
ments,  263 

Condition  of  an  enterprise,  shown 
on  "balance  sheet,"  6 
and  trial  balance,  284,  285 

Condition,  statement  of,  the  barom- 
eter of  business,  264 

Contingencies  or  reserves,  49 

Continuous  industry,  final  costs 
in,  248,  249 

Contributing  and  productive  de- 
partments of  expense,  147, 
148,  203-205 

Contributing  departments,  55,  214, 
244 

Contributmg,  or  indirect,  depart- 
ments, list   of,  149 

Control,  ledger,  of  costs,  259,  261, 
262,  263 
process,   account,  209 

Controlling  accounts,  50 
manufacturing  and   selling   ex- 
pense as  the,  242 

Cost,  a,  defined,  43 
and   accounting   system,   stand- 
ardized,      for       electrical 
manufacturing     (table), 
173,  174,  175 
reviewed,  60 
of  power,  and  hours  of  opera- 
tion, 201 
of  sales,  275,  277 


INDEX 


289 


Cost,    of   sales,    determining   the, 
274 
how  arrived  at,  29 
part,  card,  reproduction  of,  250, 

251 
prime,  56 
Cost  sheet,  final,  reproduction  of, 
254,  255,  256 
elements  of,  54 
value,  price,  17 
variation  in,  56,  57 
Cost  accounting  and  engineering, 

7 
Cost  accounting  and  manufacture, 

7 
Cost    accounting,    beginnings    of, 

7,8 
Cost  card,  final,  reproduction  of, 
253 
for  detailed  work  record,  119, 

120 
form    of,   governed   by   certain 

factors,  119 
keeping  the,  120 
sub-assembly,    reproduction    of, 
252 
Cost  data,  a  means  of  controlling 
cut-throat  competition,   34, 
35 
as  showing   fluctuating  factors 

in  unit  costs,  27 
balance  sheet,  statement  of  con- 
dition, 32 
in  determination  of  price  basis, 
26 
Costing,  actuating  medium  to  ex- 
change, 19 
controlling  principle  of,  53 
crux  of  commerce,  19 
of  scrap  material,  99 
Costing    and    labor   management, 

38,  39 
Costing  and  overhead,  245 
Costing    and    production   reports, 
47,  48 
as  a  good  investment,  41,  42 
by  factory-order  method,  46 
by  process  method,  46 
collection  methods,  44 
Costing  design,  the  objective  of, 
56 


Costing   design,    highest   function 
of,  25 
industrial,    factors    in    develop- 
ment of,  8-16 
in  relation  to  planning,  46,  47 
material    of   fluctuating   prices, 
105-107 
Costing  months  or  periods,  61 
of  expense,   the  crux  of  accu- 
racy, 246 
of  labor,  all-important  as  deal- 
ing with  human  factor,  110 
definition  of,    in    relation    to 
payroll.  111 
originated    to    meet    a    special 

need,  6 
primarily  concerned  with  prof- 
its, 21 
proper  perspective  and  propor- 
tion in,  59 
Costing  systems,  two  main,  43,  44 
Costs,  as  a  basis  for  the  budget, 
38 
as   contributing  to  the  end  of 

profit,  22 
final,    handling  fluctuations   in, 
255,  257,  258,  259 
in    assembly    industry,    248, 

249,  254,  255 
in   continuous  industry,   248, 

249 
last     preliminary    to    opera- 
tion   and    condition    state- 
ments, 263 
including    all    expenditures    in, 

245 
labor,  three  ways  of  applying 
productive  expense  to,  210, 
211 
ledger  control  of,  259,  261,  262, 

263 
price,  and  profit,  35 
sub-assembly,  how  derived,  248 
the  three  items  of,  labor,  ma- 
terial, expense,  27 
two  fixed  items  in,  27 
Costs  and  interest,  181,  182 
Count  request  in  relation  to  mini- 
mum quantities,  94,  95 
Coupon  system  under  piece  rate, 
132 


290 


INDEX 


Current    operating   reports   com- 
puted from  costs,  21 

Current    results,     importance     of 
showing,  262,  263 

Current  statements  of  operation, 
by  months  (table),  31 
one  of  the  big  features  of  cost- 
ing, 28 


Day  rate,  piece  work,  and  clock 

cards,  113 
Day  rate  system   of  wages,  129, 

130 
"Death   Rate"   in  manufacturing, 
for     thirty     years,      table 
showing,   14 
Decreasing-installment  method  of 
calculating  depreciation,  176 
Definition  of  a  cost,  43 
Definition  of  cost,  value,  price,  17 
Demand  and  supply,  in  relation  to 

competition,  34 
Department,      Engineering      and 
Drafting,  in  administrative 
expense,  207,  208 
garage,    in    administrative    ex- 
pense, 206,  207,  243,  244 
general    factory,    206,    209-211, 

244 
laboratory,     in     administrative 

expense,  207 
machine  shop,  in  administrative 

expense,  208,  242,  243 
millwright,  in  administrative  ex- 
pense, 208,  209 
office,     in     administrative     ex- 
pense, 206,  244 
repair,   or  sei'viee,  in   adminis- 
trative expense,  209 
steam,  light,  and  power,  in  ad- 
ministrative   expense,    209, 
243 
Departmentalization,  basis  of,  149, 
150 
of  expense,  52 

of  the  plant,  the  bed  rock  of 
modem   accounting,   52 
Departments,  contributing  or  indi- 
rect, list  of,  149 
of  expense,  147,  148 


Departments,    of    expense,    con- 
tributing   and     productive, 
203-205,  214 
productive,     determination     of, 
150 
Depreciation,    a   contingent   item, 
167 
agencies  in,  169,  170 
definition  of,  169 
functional,  169 
importance   of,  49,  178,   179 
methods    of    calculating,    176 
phj'sical,   169 
taxes,  insurance,  71 
Developments  in  costing  natural- 
ly slow,  16 
Differential  piece  rate,  or  Taylor, 

system,  133,  134 
Differential  wage  systems,  113 
graphic  comparison  of,  141 
Difficulties  in  costing  labor,  123, 

124 
Direct  and  indirect  expense,  215, 

216 
Direct  percentage  rate,  211 
Director^'  of  City  of  London,  list 

of  accountants,  3 
Distribution,  of  expense,  203 
of  invoices,  85,  86 
or  sales,  a  function  of  manufac- 
ture, 51 
payroll,  216,  217 
supply,    requisition,   217 
Drafting  and  Engineering  Depart- 
ment, in  administrative  ex- 
pense, 207,  208 


Economies,  theoretical,  and  busi- 
ness practice,  184 
gained  by   costing,  42 
of  existence,  closely  related  to 
accurate  costing,  20 

"Efficiency,"    or    Emerson   bonus, 
system,   137 

Elements  of  cost,  variation  in,  56, 
57 

Emerson   bonus,    or   "Efficiency," 
system,  137 

Employees  and  machines,  ratio  be- 
tween, 148 


INDEX 


291 


Employees'   liability,   or  compen- 
sation, insurance,  167 
Engineering,  a  science  evolved  in 

the  "machine  age,"  7 
Engineering  and  Drafting  Depart- 
ment, in  administrative  ex- 
pense, 207,  208 
Engineering  and  the  economic  fac- 
tor, 7 
Equipment,  arrangement  of,  148, 

149 
Equipment,  inventory,  177 
Evaluation,  definition  of,  43 
Exchange,  in  relation  to  value  and 

price,  18 
Expenditures,   all,    must    be    in- 
cluded in  costs,  245 
infrequent,  71 
Expense,  a  control  center,  146 
administrative,    in    costs,    205- 

211 
ledger,  70 

normal  and  abnormal,  245-247 
normal  and  actual,  and  the  jour- 
nal, 246 
in  relation  to  ledger,  245,  246 
or  overhead,  or  burden,  27 
productive,  three   ways   of  ap- 
plying to  labor  costs,  210, 
211 
Expense  analysis,  70 

complete,  for  cutlery  manufac- 
turer  (tables),  219-239 
controlled    by    journal    entries, 

284 
discussion    of,    with    specimen 

sheets,  151-167 
in    relation    to    expense    rates, 

276 
method  of  closing,  242-244 
of   great   value   in    department 

records,  36 
proof  of  closing,  241,  242 
sources  of  data  for,  216 
typical  illustration  of,  214-216 
applying,    to    material,    fallacy 

of,  213 
collection  of,  150,  151,  168 
costing  of,   the  crux   of   accu- 
racy, 247 
departmentalization  of,  52 


Expense  departments,  147,  148 

direct  and  indirect,  215,  216 

distribution  of,  203 

■factory,  its  ratio  to  productive 
labor,  245 

irreducible  minimum  of,  56 

labor,  material,  54 
Expense  rates,  as  related  to  ex- 
pense analysis,  276 
Expense   record,   tabulated,   of  a 
department,  37 

subdivision     and     classification 
of,  28 

the  variable  item  in  costs,  27 

two  classes  of,  selling  and  manu- 
facturing, 51 

various  factors  in,  as  determin- 
ing price-fixing,  28 


Factory  Department,  General,  206, 
244 

Factory  expense  and  productive 
labor,  ratio  between,  245 

Factory  order  costing,  46 

Federal  Trade  Commission,  on 
proper  costing,  13 

Final  cost  card,  reproduction  of, 
253 

Final  cost  sheet,  reproduction  of, 
254,  255,  256 

Final  costs,  handling  fluctuations 
in,  255,  257,  258,  259 
in  assembly  industry,  248,  249, 

254,  255 
in     continuous     industry,     248, 

249 
last    preliminary    to    operation 
and    condition    statements, 
263 

Finished  and  shipped  goods,  283 

Finished  goods  and  profit  inven- 
tories as  proving  profit, 
274,  276 

Fixed  charges,  and  similar  items, 
218 
calculation  of,  167,  168 

Fluctuations  in  final  costs,  hand- 
ling of,  255,  257,  258,  259 

Function  of  costs  defined  in  sim- 
plest terms,  39 


292 


INDEX 


Gannt  task  and  bonus  sj^stem,  137 

Garage  Department,  in  adminis- 
trative expense,  206,  207, 
243,   244 

General  Factory  Department,  209- 
211,  244 

Goods  in  process  inventory,  29 


Halsey  premium  plan,  135 

Handling  expense,  allocation  of, 
90,  92 

Heat,  light,  and  power,  in  cost- 
ing, 185 

Horsepower,  one,  in  factory  steam 
power  plants,  annual  cost 
of    (table),   200 

Horsepower  requirements  of  ma- 
chine motors  (tables),  190- 
198 

Hour,  process,  rate,  212 


"In-and-out"  clock  system  for  la- 
bor attendance,  112 

Income  tax  and  wage  payments, 
115 

"Income  and  expenditure"  basis  of 
accounting,  the  modem  way, 
6 

Increasing-installment  method  of 
calculating  depreciation, 
176 

Indirect  and  direct  expense,  215, 
216 

Indirect,  or  contributing,  depart- 
ments, list  of,  149 

Industries  as  power  users  (table), 
187 

Industiy,  assembly,  final  costs  in, 
248 
continuous,  final  costs  in,  248, 
249 

Infrequent  expenditures,  71 

Inspection  labor,  how  to  cost,  126 

Insurance  and  interest  in  account- 
ing, 49 

Insurance  and  taxes  in  costing, 
71,  165,  167 

"Integration"  of  processes  in  pro- 
duction, 5 


Interest  and  insurance  in  account- 
ing, 49 

Interest  and  proprietary  and  ten- 
ant operation,  183 

Interest,  inclusion  of,  in  costs,  181, 
182 
its  problem  in  costs,  177-184 

Interest  method  of  calculating  de- 
preciation,  176 

Interlocking  subsidiaiy  ledger  ac- 
counts, 150 

Internal  Revenue  Department, 
United  States,  report,  1917, 
of  average  profits,  12 

Inventory  and  count  request,  95 

Inventory,  annual,  poor  substitute 
for  current  statements,  28 
of  equipment,  177 

Invested  capital,  range  of  return 
on,  12 

Invoice  distribution,  instructions 
for,  86-88 

Invoices,  checking  of,  85,  86 
distribution  of,  85,  86 

Journal,  as  reflecting  normal  and 
actual  expense,  246 

entering  costmg  data  in,  71 

in  costing,  60 

material,  instead  of  order  sys- 
tem, 107 
Journal  entries,  as  an  accounting 
narrative,  284 

as  controlling  expense  analysis, 
284 

in  process  accounts,  261,  262 

Labor,  a  difficult  item  in  costing, 
108 
a  fixed  item  in  costs,  27 
a  large  and  variable  item  of  ex- 
pense, 108 
classification  of,  122 
Labor  costing,  deals  with  the  big- 
gest side  of  all  industry,  110 
what  it  is  in  relation  to  payroll, 
111 
Labor  costs,  three  ways  of  apply- 
ing productive  expense  to, 
210,  211 


INDEX 


293 


Labor  costs,   direct   and   indirect, 
55 

inspection,  how  to  cost,  126 
Labor  management  in  relation  to 
costs,  38,  39 
material,   expense,   elements   of 

costs,  54 
productive,  and  factory  expense, 
ratio  between,  245 
and  non-productive,  ratio  be- 
tween, 122 
repair,    or    excess    labor,    how 

classified,  127 
setting-up,  how  classified,  127 
unit  basis  of  charging,  127,  128 
Laboratory  Department,  in  admin- 
istrative expense,  207 
Ledger  balances,  22 

reproduction  of,  266-274 
Ledger  control  of  costs,  259,  261, 

262,  263 
Ledger     postings     (tables),     278, 

279 
Ledger,  relating  to  normal  and  ac- 
tual expense,  245,  246 
the  control  of  the  expense  an- 
alysis, 242 
Light,  costing  of,  in  industry,  189, 

190 
Light,  power,  and  heat  in  costing, 

185,  209 
Locating  employees  by  clock  num- 
ber,  115 
Loss,  must  be  accurately  charged, 

32 
Lots,  recording  by,  96,  97 


Machine  or  process  hour,  to  in- 
sure accuracy  of  cost,  53 

Machine  Age,  the,  4,  5,  6,  7 

Machine  hour  rates,  122,  211-212 

Machines  and  employees,  ratio  be- 
tween, 148 

Machine  Shop  Department,  in  ad- 
ministrative expense,  208, 
242,  243 

Maintenance,  or  special  repair, 
order,  126 

Manufacture,  two  general  func- 
tions of,  51 


Manufacturers'  Associations  favor 
uniform  costing  methods, 
10 

Manufacturing  costs,  and  profits, 
21 

Manufacturing  profit,  284 

Marginal  values  of  material,  104 

Matei-ial,  a  fixed  item  in  costs,  27 

Material  accounting,  importance 
of,  72 

Material  control  accounts,  88,  89 
direct  and  indirect,  or  produc- 
tive    and     non-productive, 
54 
essential  facts  concerning,  73 
fallacy  of  applying  expense  to, 
213 

Material  journal,  instead  of  order 
system,  107 
labor,  expense,  elements  of  cost, 

54 
marginal  values  of,  104 
minimum  quantity  of,  93,  94 
movement  of,  from  stock,  92 

Material  requisition  distribution, 
60,   61,  62,  63 

Material  stock  cards,  discussion 
of,  84 

Maximum  return,  in  relation  to 
costs,  22 

Methods  of  costing  collection,  two, 
44 

Methods  of  costing  improved  as 
tariff  protection  decreased, 
9 

Millwright  Department  in  admin- 
istrative expense,  208,  209 

Money  in  relation  to  value,  18 

Motors,  machine,  horsepower  re- 
quirements of  (tables),  190- 
198 

Multiple  costs,  definition  of,  44 

Multiple  cost  system,  illustration 
of,  45 


Nineteenth  Century,  a  period  of 
progress  in  accounting,  4 
a  wonderfully  productive  era,  4 
close   of,   great   growth   of   or- 
ganizations, 5 


294 


INDEX 


Non-productive  labor,  the  costing 
of,  125 
timekeeping  of,  125 
Normal    and    abnormal    expense, 

245-247 
Normal  and  actual  expense,   and 
the  journal,  246 
in  relation  to  ledger,  245,  246 


OflBce  and  administrative  salaries, 
charging  off,  143 

Office  Department,  in  administra- 
tive expense,  206,  244 

Operating  control   aided  by   cost 
data,  35,  36 

Operation    and    condition    state- 
ments, 263 

Operation    and    "profit    and    loss 
statement,"   6 

Operation  or  order  basis  of  cost- 
ing labor,  which?  123,  124 

Operation,  or  profit,  statement  of, 
the   acid   test   of   business, 
264 
statement  of,  281,  282,  283 
illustrated,  276,  277,  280-285 

Order  number,  keeping  costs  by, 
106,  107 

Order  or  operation  basis  of  cost- 
ing labor,  which?  123,  124 

Order  quantity,  94 

Overhead  and  costing,  245 

Overhead,  blanket,  53 
rate  of,  variable,  57,  58 

Overheads,     variation     in,     affect 
costing  accuracy,  53 

Overlapping    of   other    operating 
records  with  costs,  41 


Part   cost  card,   reproduction   of, 
250,  251 

Payroll  and  labor  costing.  111 

Payroll   distribution,    60,    65,   66, 
67,  216-217 
and  productive  labor,  277 

Payroll  forms,  113 

Percentage  of  costs  to  total  ex- 
pense, 41 

Percentage  relation,  direct,  211 


Perspective  in  costing  needed,  59 
Petty  cash  and  the  voucher  regis- 
ter, 70 
Piece  rate  wage  system,  130,  132, 

133 
Piece  work,  day  rate,  and  clock 

cards,   113 
Planning  and  costing,  46 
Planning  department,  84 
Planning,  function  of,  46,  47 
Policies  promulgated  with  aid  of 

costs,  22 
Pooling    of   capital    in    industry, 

early  steps  in,  4 
Postings,     ledger     (tables),     278, 

279 
Power    and    steam    in    industrial 

costing,  189,  190,  202 
Power  costs,  division  of,  190 
Power,  Light,  and  Steam  Depart- 
ment in  administrative  ex- 
pense, 185,  209 
Premium  plan,  Halsey,  135 

Rowan,  136 
Price,  cost,  value,  17,  18 
profit,  and  costs,  35 
related  to  demand  and  supply, 

18 
selling,  setting  of,  263 
Price  and  stock  record,  78 
Price-fixing,  in.  relation  to  expense, 

28 
Price  policies,  two  familiar,  23 
Prices,  as  related  to  competition, 
25 
fluctuating,  and  costing,  105-107 
Pricing,  a  physical  inventory,  30 
Process    accounts    in    ledger   con- 
trol of  costs,  260,  261,  262, 
263 
Process  and  finished-goods  inven- 
tories in  relation  to  profit, 
274,  276 
Process  control  account,  209 
Process  costing  method,  46 
Process  or  machine  hours,  to  in- 
sure cost  accuracy,  53 
Process  hour  rate,  212 
Producing  and  selling  in  adminis- 
trative expense,  206 
Product  and  portion  of  cost,  45 


INDEX 


295 


Production,  a  function  of  manu- 
facture, 51 
Production    reports    and   costing, 

47,48 
Production-center  arrangement  of 

equipment,  148,  149 
Production   cost    in    relation    to 

price,  19 
Productive   and   contributing   de- 
partments of  expense,  147, 
148,  203-205 
Productive  departments,  55,  214, 
244 
determination  of,  150 
Productive  expense,  three  ways  of 
applying    to    labor    costs, 
210,  211 
Productive  labor  and  factory  ex- 
pense, ratio  between,  245 
Productive  labor  and  payroll  dis- 
tribution, 277 
Productive  labor  distribution,  122, 

123 
Profit,  classified  by  products,  30 
gross,  equivalent  of,  in  rate  of 

return  on  capital,  24 
gross  margin  of,  on  sales,  24 
manufacturing,  284 
price,  and  costs,  35 
proving  the,  274,  276 
selling,  and  selling  expense,  284 
selling  cost,   and  selling  price, 
263 
Profit  or  operation,  statement  of, 
the   acid   test  of  business, 
264 
Profit  statement,  based  on  physi- 
cal inventory  (table),  31 
method  of  compiling,  56,  274 
Profit  and  Loss  account,  22 
Profit  and  Loss  statement,  in  re- 
lation to  operation,  6 
Profit  and  Loss  statements,  fur- 
nished by  costs,  128 
Profits,  classified  statement  of,  262 
differences  in,  shown  against  the 

total  volume,  32 
vitally  related  to  costing,  21 
Property  taxes  and  accounting,  49 
Proprietary  and  tenant  operation, 
and  interest,  183 


Purchase  requisition,  84 
Purchasing  department,  84 


Quantity,   difficulty   of  ascertain- 
ing, illustrations  of,  74,  77, 
79 
of  material,  74,  77,  93,  94 
order,  how  determined,  94 
Quotation  inquiries,  84 


Rate,  direct  percentage,  211 
machine  hour,  211,  212 
process  hour,  212 

Rate  of  profit,  varies  with  nature 
of   business,   23 

Ratio,  operating,  59 

Raw  material,  market  for,  some- 
times lacking,  104 
subdivided  and  graded,  104 

"Receipt  and  expense"  basis  of 
accounting,  a  primitive 
method,  6 

Receivership,  risk  of,  14 

Receiving  slip,  85 

Records  of  costing  data,  essential, 
60 

"Red  tape,"  sometimes  the  objec- 
tion to  costing,  40 

Repair,  or  excess,  labor,  127 

Repair,  or  service,  department  in 
administrative  expense,  209 

Replacement,  reserves  for,  168 
extraordinary,  49 

Requisition  for  material  issue,  92, 
93 

Reserve  accounts,  49 

Reserves,  for  replacement,  168 
or   contingencies,   49 

Rowan   premium  plan,  136 


Salaries,    administrative   and    of- 
fice, charging  off,  143 
Sales,  cost  of,  274,  275,  277 
gross,    as    related    to  invested 

capital,  24 
in  proportion    to    capital    and 

surplus,  182 
range  of  profit  on,  13 


296 


INDEX 


Sales  executive  and  profit  state- 
ments, 32 

Sales  totals,  prices,  profits,  26 

Savings  effected  by  costs  render 
costing  a  good  investment, 
41 

Science  of  cost  accounting  estab- 
lished to  stay,  16 

Scrap,   costing  of,   dependent  on 
importance  of  the  item,  102 
in  tableware  plant,  100,  101 
percentage  of,  99,  100 
waste,  spoilage,  accounting  of, 
98,  99 

"Seconds"  in  relation  to  costs,  104 

Selling  and  producing  in  adminis- 
trative expense,  206 

Selling  cost,  selling  price,  and 
profit,  263 

Selling  expense,  selling  cost,  and 
profit,  263 

Selling  expense  and  selling  profit, 
284 

Selling  price,  setting  of,  263 

Service,  supplied  by  costs,  22 

Service  and  attendance  bonus,  139, 
140,  143 

Service,  or  Repair,  Department  in 
administrative  expense, 

209 

Setting-up  labor,  how  classified, 
127 

Single  costs,  definition  of,  43,  44 

Sources  of  information  for  the 
expense  analysis,  216 

Specialization,  the  present  period 
of,  18 

Special  repair,  or  maintenance, 
order,  126 

Specification  sheets,  or  bills  of 
material,  73,  74,  75 

Spoilage,  costing  of,  102,  103,  104 

Standard  bonus  percentage  table, 
138 

Standard  depreciation  rates  for 
factory  buildings  and 
equipment,  171,  172 

Standardized  accounting  and  cost 
system  for  electrical  manu- 
facturing (table),  173,  174, 
175 


Statement  of  condition  (table),  33 
the  barometer  of  business,  264 

Statement  of  condition  and  trial 
balance,  284,  285 

Statement  of  operation,  281,  282, 
283 
illustrated,  276,  277,  280-285 

Statement  of  profit,  method  of 
compiling,  274,  275,  276 

Statement  of  profit  or  operation, 
the  acid  test  of  business, 
264 

Statements  of  operation  and  con- 
dition, 263 

Statistics  of  costs  aid  operation, 
35,  36 

Steam  and  power  in  industrial 
costing,  202 

Steam  consumption  in  prime 
movers,  range  of  (table), 
199 

Steam,  Light,  and  Power  Depart- 
ment in  administrative  ex- 
pense, 209,  243 

Stock  and  price  record,  78 

Stock  card,  76,  83 

Stores  records,  their  importance 
in  relation  to  costing,  81, 
83 

Straight-line  calculation  of  depre- 
ciation, 176 

Sub-assembly  cost  card,  reproduc- 
tion of,  252 

Sub-assembly  costs,  how  derived, 
248 

Subdivision  of  accounts  an  aid  in 
material  records,  89 

Subsidiary  records  of  material,  74 

Supplies,  costing  of,  97,  98 

Supply  and  demand,  in  relation 
to  competition,  34 

Supply  requisition  distribution, 
60,  63,  64,  65,  217 

Surplus,   sales,    and   capital,   182 


Tabulating  machine  for  statistics, 

120 
Tariff,  protective,  8,  9 
Tariff   Commission,   its  effect  on 

costing,  8,  9 


INDEX 


297 


Tariff  legislation  and  industrial 
costing-,  8 

Task  and  bonus  system,  Gannt, 
137 

Taxes,  insurances,  depreciation,  71 

Taxes  and  insurance  in  costing, 
165,  167 

Taylor,  or  differential  piece  rate, 
system,  133,  134 

Tenant  and  proprietary  operation, 
and  interest,  183 

Textiles  and  the  problem  of  waste, 
102 

Time  cards  and  the  payroll  depart- 
ment, 113 

Time  clock,  essential  to  accurate 
labor  costing,  111 
ia-and-out,  most  satisfactory  la- 
bor attendance  record,  112 

Timekeeping,  in  costing  of  labor, 
110,  111 

Time-study,  as  an  aid  in  setting 
piece  rates,  133 

Traditional  practice  compared 
with  modem  costing,  30 

Training  Service,  United  States, 
graphic  explanation  of  dif- 
ferential wage  systems,  141 

Trial    balance   and   statement   of 
condition,  284,  285 
reproduction  of,  265 

Trial  balance   (table),  280 

Turnover,  definition  of,  23 
frequency    of,    and    margin    of 
profit,  24 

Typical  expense  analysis,  com- 
plete, for  cutlery  manufac- 

^  turer  (tables),  219-239 

concretely   illustrated,   214-216 


Uniform  costs  system  established, 

10 
Unit   arrangement  of  equipment, 

148,  149 


Unit  basis,  a  variant  of  the  proc- 
ess rate,  212-213 

Unit  basis  of  charging  labor,  127, 
128 

"Unit"  cost,  relation  of  wages  and 
output,  109 

Unitizing,  or  the  unit  system  of 
charging  labor,  127,  128 

United  States  Training  Service, 
graph  of  differential  wage 
systems,  141 

Utility,  value,  cost,  price,  17 


Valuation  of  material,  relation  of, 
to  stores  records,  81 

Value,  price,  cost,  17 

Variations  between  costs  of  iden- 
tical articles,  an  argument 
for  costing,  11 

Varying  material  price  in  rela- 
tion to  costing,  106 

Volume  and  prices,  25 

Volume,  effect  of  the  war  upon, 
26 
large,  at  small  margin,  23 
small,  at  large  margin,  23 

Voucher,  function  of,  90 

Voucher  register,  50,  60,  67,  68, 
69,  70,  217-218 


Wage  policy  and  its  relation  to 

costs,  22 
Wage  record  (tables),  117,  118 
Wages,  in  relation  to  labor,  109 
Wage  svstems,  different  kinds  of, 
129 
differential,  113 
discussion  of,  129-145 
Waste  in  the  textile  industry,  102 
Work  ticket,  relation  of  to  cost- 
ing and  planning,  47 
World  War,  an  impetus  to  proper 
costing,  14,  15 


(1) 


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COST  ACCOUNTING  AND  BURDEN  APPLICATION 

By  CLINTON  H.  SCOVELL 

The  principles  in  analyzing  and  compiling  the  cost  of  business 
clearly  stated.  Particular  emphasis  on  overhead  charges  or 
burden, 

BOOKKEEPING  AND  ACCOUNTING 

By  JOSEPH  J.  KLEIN 

A  practical  and  simple  business  manual.  Published  in  three 
parts:    Introductory,  Advanced,  and  Complete  Courses. 

RETAIL  ORGANIZATION  AND  ACCOUNTING 
CONTROL 

By  PHILIP  I.  CARTHAGE 

The  best  ways  to  secure  thorough  organization  and  control  of 
the  retail  store.  Applicable  to  any  size  stores.  Complete, 
practical,  up-to-date. 


D.    APPLETON    AND    COMPANY 

NEW  YORK  LONDON 


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BOOKS    ON   ADVERTISING 

THE  BUSINESS  OF  ADVERTISING 

By  EARNEST  ELMO  CALKINS 

A  complete  survey  of  the  entire  field  of  advertising  from  the 
standpoint  of  the  advertising  man,  the  manufacturer,  the  re- 
tailer, and  the  public. 

ADVERTISING  ANT)  SELLING 

By  HARRY  L.  HOLLINGWORTH 

Long  investigation  and  experience  here  analyzes  the  pulling- 
power  of  advertising  appeals.  Exact  information  on  their  rela- 
tive values. 

EFFECTIVE  DIRECT  ADVERTISING 

By  ROBERT  E.  RAMSAY 

A  detailed  handbook  on  every  kind  of  direct  advertising,  in- 
cluding physical  make-up,  principles  and  functions  of  copy,  and 
the  methods  of  distribution. 

THE  TYPOGRAPHY  OF  ADVERTISEMENTS  THAT 
PAY 

By  GILBERT  P.  FARRAR 

How  to  set  up  to  most  effect  an  advertisement  of  any  size  or 
shape,  what  type  to  use,  how  to  build  the  advertisement,  fit  in 
pictures,  etc.     Fully  illustrated. 

EFFECTIVE  HOUSE  ORGANS 

By  ROBERT  E.  RAMSAY 

The  standard  work  on  how  to  edit  and  publish  a  successful 
house  organ.  Every  detail  is  covered,  and  the  book  is  fully 
illustrated. 

BUSINf:SS  RESEARCH  AND  STATISTICS 

By  J.  GEORGE  FREDERICK 

An  authority  on  business  research  analyzes  the  principles  and 
the  details  of  the  subject.     A  business-like  book. 

D.    APPLETON    AND    COMPANY 

NEW  YORK  LONDON 

T674 


Valuable   Books   for  the   Business   Man 

THE  GREAT  GAME  OF  BUSINESS 

By  J.  GEORGE  FREDERICK 

The   rules,  fascination,  services   and   rewards  of  business  pre- 
sented for  the  forward-looking  business  man. 

COMMERCIAL  CORRESPONDENCE 

By  R.  S.  BUTLER  and  H.  A.  BURD 

A  work  that  tells  how  to  write  all  kinds  of  business  letters  that 
accomplish  what  you  want  them  to. 

A^IERICAN  BUSINESS  LAW 

By  JOHN  J.  SULLIVAN 

Designed  to   answer  such  practical   legal   questions  as  perple:» 
the  business  man.     Useful  and  reliable. 

A  TEXTBOOK  OF  FILING 

By  JAMES  N.  McCORD. 

This  book   gives  complete   and   workable  methods   of  keeping 
efficient   and   up-to-date   files. 

PROPERTY  INSURANCE 

By  SOLOMON  S.  HUEBNER 

Presents  the   important   facts   and   problems   of  those   forms   of 
insurance  which  indemnify  owners  against  the  loss  of  property. 

VOCATIONAL  PSYCHOLOGY 

By  H.  L.  HOLLINGWORTH 

The  practical  methods  of  picking  the  right  man  for  the  right 
job,  based  on  extensive  experiments  and  tests. 

D.    APPLETON    AND    COMPANY 

NEW  YORK LONDON 

T677 


PRACTICAL  BOOKS  ON  SELLING 


MARKETING 

By  C.  S.  DUNCAN 

A  complete   and   practical   treatment  of  the   marketing  of  raw 
materials,  farm,  products,  and  manufactured  goods. 

MODERN  SALESMANAGEMENT 

By  J.  GEORGE  FREDERICK 

Every   problem   that   faces   a    salesmanager   of  developing   and 
directing  a  sales  force,  covered  in  graphic  style  by  an  authority. 

FUNDAMENTALS  OF  SALESMANSHIP 

By  N.  A.  BRISCO 

How  to  make  sales  and  how  to  acquire  qualities  essential   for 
making  a  successful   salesperson. 

RETAIL  SELLING  AND  STORE  MANAGEMENT 

By  PAUL  H.  NYSTROM 

For  the  retailer  of  any  kind  of  goods.    A  book  that  tells  how  a 
store  should  be  run  to  very  best  advantage. 


THE  HUMAN  SIDE  OF  RETAIL  SELLING 

By  RUTH  LEIGH 

A  book  that  talks  to  the  salesperson  in  her  own  language.  In 
swift,  easy  style  shows  the  best  methods  of  making  a  sale, 
treating  the  customer,  displaying  the  goods,  etc. 


D.    APPLETON    AND    COMPANY 

NEW  YORK  LONDON 


T672 


UNIVERSITY  OF  CALUORNIA  LIBR.\RY 

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